Hello Wazuans. All protocols observed and that out of the way
Being January I thought it best to come up with a hypothetical scenario for wazuans to chew on and we can all hopefully benefit from the brilliant minds here as they chambua it.
My hypothetical involves two midlevel managers, John and Charles working at a bluechip company in Westlands. Both hold the same qualifications, are of the same age (35) and earn the same salary. They both happen to have one kid each and spouses who choose to stay at home mums (this is for simplifying the hesabus). John and Charles both earn Sh. 300,000 gross per month. According to calculator.co.ke, this will result in a net pay of Sh. 215,547 each month. They both currently live in the same apartment block in Kileleshwa and pay rent of Sh. 40,000 per month for a 2br apartment. They then both spend 60,000 per month on food and other expenses for a total of Sh. 100,000 thus leaving them with Sh. 115,547 as free cash available for investment.
John has watched the Utahama Lini advert and feels like he is throwing away money by paying rent and is now ready to take a mortgage. He has saved 1.3 million bob cash to pay the 10% down payment so he then gets a 13 million bob loan at 13% interest from a local bank to buy a 2br apartment in Kileleshwa that’s on sale for 14.3 million. His wife and daughter love the apartment and his friends also compliment him on his purchase. Having to no longer pay rent, he now has the 40,000 bob to add to his free cash of 115,000 for a total of 155,000 as mortgage payments. Based on the mortgage calculations the bank provides him, he will pay a monthly amount of Sh. 152,304 for 20yrs. He diligently pays this amount per month for 20yrs and makes his last payment at the age of 55. After 20yrs, he has paid the bank the principal figure of Sh. 13m plus interest of Sh. 23,553,164 for a total payment of Sh. 36,553,164. At the end of the 20yrs, his apartment in Kileleshwa that was priced at 14.3m at purchase is now valued at Ksh. 50m due to escalation over the years.
During the 20yrs, his employer gives him a 5% pay rise per year but he uses the additional amount to meet the rising costs of life’s basics like shopping and fees. He therefore keeps his mortgage payment constant throughout the 20yrs. His dedication to paying off the mortgage means that he never has any free cash to make any other type of investment except his pension which stands at a total sum of Sh. 8 million at the age of 55 and pays out a monthly annuity of Sh. 66,000 in his retirement. His daughter is now ready to join university in Australia at a cost of Sh. 1.5m a year for a 4yr course. He is averse to selling the apartment although its value has escalated as he feels he is not ready to settle down in his rural farm yet.
Summary of assets at 55: Apartment worth 50m and Pension worth 8m for total networth of Sh. 58 million.
Charles on the other hand has also shopped around for a house but does not like the idea of being indebted for an amount he considers high for such an extended period of time (20yrs) as he is not sure that his company will not close its Kenya office during that time as has happened to some other companies in his industry. Like his colleague John, he has also saved Sh. 1.3m in the bank. He decides to take this lumpsum amount and invest it into the Nairobi stock market buying a couple of blue chips mixed with some growth stocks. Just like John, he earns a net salary of 215,547 and pays rent of Sh. 40,000 for a 2br apartment worth 14m and has monthly living costs of 60,000. He also has Sh. 115,000 to invest. He thinks his landlord may surprise him with rent increases every so often so he decides to set aside Sh. 30,000 in a savings account so that he can set up a standing order to his stock broker for the balance 85,000 every month without worrying whether his rent will go up. When the rent does go up, he finances the extra cost from the savings in the bank without having to reduce his monthly investment amount. The 30,000 per month savings also serve as his cash buffer in case any major financial need comes up that is totally unavoidable so that he is never forced to borrow. Like John, his employer gives him a 5% pay rise per year which he uses to meet the rising costs of life’s basics like shopping and fees. He uses a standing order to the bank so as to make his investment automatic and through this manages to never miss a payment for 20yrs. His portfolio, a mix of growth and blue chip stocks manages to return an average annual return of 13% over the 20yrs although in his best year he manages to get 47% annual return but also gets a negative return of -11% in his worst year with a lot of fluctuations in between. Based on his average 13% return compounded annually on his lumpsum of 1.3m and constant monthly investment of 85,000, his portfolio is valued at Sh. 102,356,790 after 20yrs at the age of 55. He doesn’t own a house but has a pension worth Sh. 8 million from his employer that pays out a monthly annuity of Sh. 66,000 in his retirement. His daughter also has been admitted to a top university in Canada at a cost of Sh. 2m per year for a 4yr course. He is also looking to live in his own house as he doesn’t want to pay rent in retirement. However, he is willing to settle further away from the busy CBD as he is no longer working and has seen that he can buy land in juja and build his own maisonette at a cost of Sh. 50m.
Summary of assets at 55: Stock portfolio worth 102m and Pension worth 8m for total networth of Sh. 110 million.
John and Charles meet at their retirement parties and reflect on their long journey to retirement.
Discuss (10 marks)
Derive the monthly rent Charles is most likely paying for his apartment in year 19 (5 marks)
KILELESHWA 2BR APARTMENT - Sh. 13.5mn PAYE CALCULATORMORTGAGE CALCULATORCOMPOUND INTEREST CALCULATOR