Blog Details

Benjamin Cheruiyot, the engagement lead at Abojani Investments, a personal finance and investment advisory firm

You need to look at your individual expenses on rent, foodstuffs, fuel, and shopping and determine what areas you can reduce to make room for the establishment of an emergency fund and possibly avoid short-term debt every month. Draw a budget that accurately captures what you need to get you through the month without incurring unnecessary debt. You may find that routine weekend outings are unnecessarily costly. Typically, rent should not exceed 20 percent of your take-home salary. In your case, that’s Sh25,000. With a small family, shopping and food can take Sh15,000, fuel Sh10,000, water and electricity Sh2,000, school fees Sh10,000 (depending on the choice of school), and miscellaneous Sh8,000. The remaining Sh20,000 can be allocated as follows: Sh5,000 to your SACCO, Sh5,000 to your ordinary bank account, Sh5,000 to a money market fund, and, Sh5,000 as liquid savings for ‘small’ unforeseen expenses.

The importance of an emergency fund is that you earn decent interest among certain fund managers. Savings of Sh5,000 monthly will accumulate to Sh64,000 in the first year. The benefit of compound interest will snowball your savings to Sh400,000 in five years. Funds are accessed between 2 to 3 days upon request. Continuous savings of Sh5,000 in your bank account will grow your savings from Sh15,000 to Sh75,000 in a year. These savings come in handy when you need money for car repairs, car insurance, or sudden out-of-town trips. Basically, you must keep it to a certain level (eg Sh100,000). Once you hit this figure, you may redirect the monthly Sh5,000 to the money market fund account. Any debits from this account should be replenished to the set maximum amount. This practice not only creates liquidity but also prevents you from sliding into expensive predatory loans.