the mathematics looks good, but practice usually is a whole other thing. starting off, not everyone has the 100m saved up to construct, especially salary earners. Many save as they build, and because of the construction, they tend to save more than they would otherwise to ensure progress. for a family of 4+1, earning 8m ( hopefully net), chances are their lifestyle is eating into 70% of that income, leaving them with at most 30 million a year, and that is if there do not have any other external expense for example school fees for a masters degree, parents, siblings and the non ending required support in our circles today. let us say they are brave enough to save the 30m, it will take them the next 3.5 years to save it. in the meantime their salaries are growing by almost 10% every two years, which is common for most job roles. 10% of 8m is 800k. the rent in Kampala is seemingly increasing at the rate of about 3 to 5% and if you add on family expansion, it can mean higher. and guess what, i have seen many couples where one of the incomes is lost, especially as they go into their 40s, which changes the mathematics totally.. do i think investing is wise? of course. However, life is not mere arithmetics, it is real. it is always important to take care of the basics first. 1. put food on the table, clothing on their backs, health care, and a roof over their heads. cover housing early, before kids fees sky rockets. dont aim for an expensive home, build a modest one that wont eat into your income. avoid going into your 40s when basic needs are still a challenge, it will mess up your ability to heavily invest.
i have read a lot of articles, and watched many videos that are trying to convince everyone that building wealth is a sprint, no my dear, it is a marathon. it is way easier to grow your wealth when the basics are out of your way.
once you have the basic needs fully covered, increase on your investment for retirement, and the children's education. and once these are taken care of, become even more generous now.
again, wealth building is not a mere mathematical equation, it is not a sprint, it is something you do diligently over time.
Hey Kakande, these numbers are always colorful, and inspirational, and God knows, I love you for that! I mean, you can make me want to sell all I have for Bonds and just sit back and not work anymore, waiting to become a billionaire in 10yrs and then buy back the world! But sometimes, they are too colorful! Why is a doctor and a professional renting a 500k house? Do you know what a 500k house looks like in Kisaasi, Kyanja, Kiwatule, Lungujja and Mengo? For a family of 4, and not counting the maid. Are they done having kids? It means soon they are renting a house at probably 1m for a 2 bedrooms with more decent amenities like compound, near schools and the like. Then school fees and the lot kick in because of the kids. Are they still able at that point able to add 30m annually to the bond? Yes they are young professionals, but not guaranteed to be employed pakalast, in this economy. Doctors too leaving government, and many are running around looking for gigs, and demanding private clinics for 6 months arrears. Maybe we should also look at plans where they can construct, and still save to build a decent bonds portfolio. I doubt that homes/houses are primarily built for sleep. But who knows! Thanks for the articles!
I am happy for you for having conversations with clients like this.
You are correct that the clients should invest in rental properties, and if feasible, live as owner-tenants in one of the units.
A few things I like you to consider that I did not see in your article:
1. You did not introduce the option of leverage. Your clients, based on your description and their jobs, are surely credit worthy. I don't know the rules in Uganda, but if we apply USA rules, for a rental complex with 4 units, high quality, good size, it should be possible to get 75% financing. That is called leverage, and you need to compare the 25% invested by your couple versus 100% of the money for bonds. If a 4 unit complex costs UGX 1 Billion, they would have to come up with UBX 250 million. They will still get all the benefits of the full UGX 1 Billion asset value. To compare they would have to have UBX 1 Billion in Bonds, which they could not afford
2. You have to answer the question why bonds offer a 14% interest rate. In my opinion the main reason is the deteriorating value of the currency. If the UGX were a great currency interest would be maybe 4% or 5%. That means the return you are calculating in your article is mathematically correct, but the purchasing power of that money might be very much lower than in today's money.
3. You did not introduce the aspect of inflation which was, on average, about 6%/year the last 10 years or so in Uganda. If your couple gets UGX 750 million loan for 10 years to buy the investment rental complex, by the time that loan is due for renewal, it will have lost 60% of its value. This also applies to your couple. Even the husband needs to increase his income by 6%/year to retain purchasing power at today's levels.
Your advice is spot on and think it is wonderful that you are working on helping the Ugandan population to learn these things and then invest wisely. I commend you for that.
Maybe some of my input can help you in future consultations.
By the way, there is also an aspect to consider when it comes to economic and currency strength. Your client couple might be better off to keep working in Uganda and investing out of the country where currency risk and inflation are lower. That is not easy but worth a consideration.
Thank you Dr Axel, and indeed you raise pertinent points I should consider next in my write ups. I appreciate the feedback.
Yes Inflation last year was 6% but in the last 5 years it has averaged around 4%.
Leverage in Uganda is hard to come by and borrowing rates are as high as 18% on the cheap and that limits people.
On Currency deterioration risk, its actually interesting, since 2015, the UGX has only lost 23% to the Dollar in a space of 10 years but this is critical to think and plan for in the investment.
I agree that the mathematical projections are solid. If they save 30 million Ugandan shillings annually, they could accumulate over 110 million shillings in three years (including interest). Even with a rental expense of 800,000 shillings per month, increasing at 5% annually, they would still have the means to cover rent and potentially build a home within the next decade using the returns from the bonds.
In reality the situation changes for those with lower savings. For individuals in this category, their savings might not generate enough interest through bonds to cover rent. It's a behavioral challenge that many people struggle to save because they either spend too much on rent or live in homes that are beyond their means or other costs offcourse.
Investing before building a home is indeed wise, but it either requires a long-term investment horizon for those with lower savings or an increase in income. The math works in theory, but practical financial planning also involves understanding one’s current savings and income potential. Definitely It's crucial to balance financial and emotional aspects in such decision
Thanks Acheles, I plan on writing another article on those with lower incomes/savings to cover their angle and you have given me an extra angle to bring this in.
Thanks Alex for sharing real life situations and calculations. In a bid to remain consistent, can you instruct the bank to deduct the 3M every month to add to your bond portfolio? Or you have to do it “manually”.
the mathematics looks good, but practice usually is a whole other thing. starting off, not everyone has the 100m saved up to construct, especially salary earners. Many save as they build, and because of the construction, they tend to save more than they would otherwise to ensure progress. for a family of 4+1, earning 8m ( hopefully net), chances are their lifestyle is eating into 70% of that income, leaving them with at most 30 million a year, and that is if there do not have any other external expense for example school fees for a masters degree, parents, siblings and the non ending required support in our circles today. let us say they are brave enough to save the 30m, it will take them the next 3.5 years to save it. in the meantime their salaries are growing by almost 10% every two years, which is common for most job roles. 10% of 8m is 800k. the rent in Kampala is seemingly increasing at the rate of about 3 to 5% and if you add on family expansion, it can mean higher. and guess what, i have seen many couples where one of the incomes is lost, especially as they go into their 40s, which changes the mathematics totally.. do i think investing is wise? of course. However, life is not mere arithmetics, it is real. it is always important to take care of the basics first. 1. put food on the table, clothing on their backs, health care, and a roof over their heads. cover housing early, before kids fees sky rockets. dont aim for an expensive home, build a modest one that wont eat into your income. avoid going into your 40s when basic needs are still a challenge, it will mess up your ability to heavily invest.
i have read a lot of articles, and watched many videos that are trying to convince everyone that building wealth is a sprint, no my dear, it is a marathon. it is way easier to grow your wealth when the basics are out of your way.
once you have the basic needs fully covered, increase on your investment for retirement, and the children's education. and once these are taken care of, become even more generous now.
again, wealth building is not a mere mathematical equation, it is not a sprint, it is something you do diligently over time.
Thanks Jules.
Hey Kakande, these numbers are always colorful, and inspirational, and God knows, I love you for that! I mean, you can make me want to sell all I have for Bonds and just sit back and not work anymore, waiting to become a billionaire in 10yrs and then buy back the world! But sometimes, they are too colorful! Why is a doctor and a professional renting a 500k house? Do you know what a 500k house looks like in Kisaasi, Kyanja, Kiwatule, Lungujja and Mengo? For a family of 4, and not counting the maid. Are they done having kids? It means soon they are renting a house at probably 1m for a 2 bedrooms with more decent amenities like compound, near schools and the like. Then school fees and the lot kick in because of the kids. Are they still able at that point able to add 30m annually to the bond? Yes they are young professionals, but not guaranteed to be employed pakalast, in this economy. Doctors too leaving government, and many are running around looking for gigs, and demanding private clinics for 6 months arrears. Maybe we should also look at plans where they can construct, and still save to build a decent bonds portfolio. I doubt that homes/houses are primarily built for sleep. But who knows! Thanks for the articles!
That's what they told me they are paying as Rent. But you can use a different figure and see how it adjusts.
Same way they told me 100 Million house, they are minimalistic and I think it works for them.
I am happy for you for having conversations with clients like this.
You are correct that the clients should invest in rental properties, and if feasible, live as owner-tenants in one of the units.
A few things I like you to consider that I did not see in your article:
1. You did not introduce the option of leverage. Your clients, based on your description and their jobs, are surely credit worthy. I don't know the rules in Uganda, but if we apply USA rules, for a rental complex with 4 units, high quality, good size, it should be possible to get 75% financing. That is called leverage, and you need to compare the 25% invested by your couple versus 100% of the money for bonds. If a 4 unit complex costs UGX 1 Billion, they would have to come up with UBX 250 million. They will still get all the benefits of the full UGX 1 Billion asset value. To compare they would have to have UBX 1 Billion in Bonds, which they could not afford
2. You have to answer the question why bonds offer a 14% interest rate. In my opinion the main reason is the deteriorating value of the currency. If the UGX were a great currency interest would be maybe 4% or 5%. That means the return you are calculating in your article is mathematically correct, but the purchasing power of that money might be very much lower than in today's money.
3. You did not introduce the aspect of inflation which was, on average, about 6%/year the last 10 years or so in Uganda. If your couple gets UGX 750 million loan for 10 years to buy the investment rental complex, by the time that loan is due for renewal, it will have lost 60% of its value. This also applies to your couple. Even the husband needs to increase his income by 6%/year to retain purchasing power at today's levels.
Your advice is spot on and think it is wonderful that you are working on helping the Ugandan population to learn these things and then invest wisely. I commend you for that.
Maybe some of my input can help you in future consultations.
By the way, there is also an aspect to consider when it comes to economic and currency strength. Your client couple might be better off to keep working in Uganda and investing out of the country where currency risk and inflation are lower. That is not easy but worth a consideration.
Thank you Dr Axel, and indeed you raise pertinent points I should consider next in my write ups. I appreciate the feedback.
Yes Inflation last year was 6% but in the last 5 years it has averaged around 4%.
Leverage in Uganda is hard to come by and borrowing rates are as high as 18% on the cheap and that limits people.
On Currency deterioration risk, its actually interesting, since 2015, the UGX has only lost 23% to the Dollar in a space of 10 years but this is critical to think and plan for in the investment.
Hello Alex,
I agree that the mathematical projections are solid. If they save 30 million Ugandan shillings annually, they could accumulate over 110 million shillings in three years (including interest). Even with a rental expense of 800,000 shillings per month, increasing at 5% annually, they would still have the means to cover rent and potentially build a home within the next decade using the returns from the bonds.
In reality the situation changes for those with lower savings. For individuals in this category, their savings might not generate enough interest through bonds to cover rent. It's a behavioral challenge that many people struggle to save because they either spend too much on rent or live in homes that are beyond their means or other costs offcourse.
Investing before building a home is indeed wise, but it either requires a long-term investment horizon for those with lower savings or an increase in income. The math works in theory, but practical financial planning also involves understanding one’s current savings and income potential. Definitely It's crucial to balance financial and emotional aspects in such decision
Thanks Acheles, I plan on writing another article on those with lower incomes/savings to cover their angle and you have given me an extra angle to bring this in.
Valuable insights shared, thank you Alex
Thank you Alex. This is inspirational this morning.
A great article. Thank you Alex.
Thanks Alex for sharing real life situations and calculations. In a bid to remain consistent, can you instruct the bank to deduct the 3M every month to add to your bond portfolio? Or you have to do it “manually”.
Open mouth, Insert Foot https://open.substack.com/pub/michael880/p/open-mouth-insert-foot?r=3b6pw1&utm_campaign=post&utm_medium=web
Do we consider land value increament in this case and its coordination with the bonds appreciation value ?