By Anthony Ngatia
In these tough economic times, there is a deluge of personal finance information out there. And with this overexposure to information to information bring with it a mortal danger of getting confused as to what to apply and what to ignore.
The good news is that not every piece of information might be relevant. But there is one thing that is crucial. And this is the saying: “Do not bite off more than you can chew”.
This means that you should never try to do something that is too difficult for you. In the language of money, the saying means ‘Do not spend more than you can afford’.
We all need to have a plan for our children’s education, health, owning a home, creating an emergency fund and building a retirement fund-all of which ordinarily demand some degree of austerity and financial discipline on one hand. At the same time, there is the pressure to live each day at a time, live luxuriously and enjoy life while it lasts.
So, how do you balance between the two extremes?
The ever-rising cost of education poses one of the greatest challenges for most parents. And at the heart of the issue is the question about how to give your child quality education without breaking the bank.
Children Education
Personal finance experts say the process requires one to think realistically. Pauline Oyugi, an education consultant, says that one does not need piles of money to afford quality education for their children. Instead, what one needs ‘intelligence’ so as to exploit the loopholes in the education system.
“You can begin your child’s education in a private kindergarten and nursery school and then enroll your child in good performing public primary school,” she says.
“Alternatively, you can enroll them in a private school up to middle primary before transferring them to well performing public schools,” she says.
This according to her will give a parent a “breathing space”, to accumulate some savings for the next financially demanding stage, which is the secondary school.
Personal finance experts however say education needs long term planning. Most parents pay school fees directly from their income and this can become an uphill struggle. They propose that parents take out an education insurance policy, which guarantees that one pays a little amount of money over long period of time towards kids’ education without affecting their other financial plans. In this way, the parent will not be biting off more than they can chew.
Personal finance experts urge parents who are overwhelmed by the fees burden to explore other sources of funds. These days a number of independent players in education sector are providing bursaries and scholarships that are helping some distressed parents. And while these could be small, every bit helps in personal finances.
Owning a home
With home ownership in urban Kenya estimated to be below 30 per cent, the majority of us are tenants. We fork out several thousands of our hard earned monies to others, and we remain poor. The question about how much should one pay for housing mortgage or rent for that matter is one that personal finance experts have grappled with for some time.
Edward Kassanga, a CPA and financial expert offers some guidelines for taking a mortgage towards home ownership:
”You need first to determine your gross monthly income. You get this by adding up all your monthly incomes from various sources. The second step is to decide the percentage of your monthly income you will be committing to service debts of all kinds.
“Any percentage from 25 to 35 is ideal, although the lower the percentage, the better,” he says.
The third step is determining “the exact maximum percentage” that can go towards servicing a mortgage. This, according to him, is determined by deducting all the other debts from the figure.
For example, if your income is a gross of Sh50,000 per month, but your side businesses give you an extra Sh20,000, your gross monthly income totals Sh70,000.
“Assuming the debt service rate of 25 per cent, you can only manage to service debts to the tune of Sh17, 500. From this figure, then, you need to determine how much exactly can be left with to service mortgage,” he says.
“Assuming your other debts amount to Sh7, 500, then it simply means that the amount of mortgage you can service is Sh10, 000,” he says. “After determining the figure you can afford to service a mortgage, then shop around for the products matching your ability to service,” he says.
For renters, which are the majority of the people, figuring out how much one can afford as monthly rent without ‘biting more than they can chew’ is difficult. Just use the tested thumb rule: the Rule of 36.
This rule indicates that you can only realistically afford to rent a house that is no more than a 1/3 of your income. Supposing your income is Sh240, 000 per year (Sh20,000 per month), the monthly rent you can afford without straining, according to the Rule of 36 is obtained by simply dividing Sh240,000 by 36 to obtain Sh6,667.
Creating an emergency fund:
With times getting ever harder, building an emergency fund is a great idea. But it requires some effort to achieve it. Most people who have heavy financial responsibilities believe that it is impossible to squeeze a few shillings from their tight budget. But there is probably more spare cash in your budget than you probably think, according to personal finance experts.
“If one reduced their debts and slightly adjusted their lifestyle, and make a firm commitment to be conscious in their spending every month, they can free up some money that can be gradually saved in an account yielding some interest,” Kassanga says
He, however, says that the amount of emergency fund one should build should be guided by the nature of security in their job.
“If your job has a high security, then three months equivalent savings can be enough,” he says.
“Those in shaky jobs require over six months equivalent salary in form of savings,” he says.
But he pointes out that a years’ income is much better. “Building an emergency fund requires some discipline, however, since one can be tempted to spend it at once,” he says.
Medical care:
An overwhelming majority of people do not have plans for medical care, even though the cost of medical care is rising. The government’s insurance fund is inadequate, and hence one should have a second medical insurance cover. The market has a number of players from where one could sample the range of products on offer.
Retirement plans:
Despite other financial obligations, you have to plan for your retirement. You cannot count on the Government or children to take care of your financial needs at old age.
“Start saving the very first month you are employed,” says Kassanga. “Do not let anything, including education, ruin your retirement plans.”
