I earn Sh90,000 per month but even though I got my salary a year ago, I didn’t save anything. I have an unpaid bank loan of Sh700,000 and my husband, who is a student, needs Sh10,000 every month. I paid Sh8,000 for my daughter’s school, Sh9,000 for a house, Sh1,500 for Wi-Fi and Sh4,000 for water and electricity. I also allocated Sh2,000 for my mother’s care and Sh6,000 for my sister’s university fees. I paid my shylock loan of Sh200,000 in monthly installments of Sh30,000, and monthly shopping expenses of up to Sh30,000. Please help me get out of debt as I am almost 40 years old.
Dominic Karanja, financial and investment consultant
You are in the accumulation phase of your life where you should focus on building and increasing your wealth. This phase includes higher earning potential, active savings, investments, and planning for future financial goals.
It’s time for you to make a tough choice because your current expenses are outpacing your income, so you’re struggling to pay off your debt.
Your monthly income is Sh90,000, and your monthly expenses are around Sh100,500. In your list of expenses, you may overlook things like transportation costs, personal care, health, entertainment and more.
To achieve your financial goals, create a comprehensive financial plan and budget. Monitor all income and expenses to identify areas where cuts can be made.
Consider using a budgeting app or spreadsheet to help manage your finances. Use the 50:30:20 budgeting rule, where you allocate 50 percent of your after-tax income to needs, 30 percent to wants and 20 percent to savings and investments.
A need is what you need to live, but a want is what you want. Savings refers to money set aside, while investing involves putting those saved funds into productive income-generating activities.
I will categorize your wife’s education, daughter’s school, house, water and electricity, paying shylock debt, paying off commercial bank debt and shopping as part of your needs, and other expenses as part of your desires.
Based on the classification, you spend Sh91,000 on your needs against an expected target of Sh45,000 and Sh9,500 on your wants against an expected target of Sh27,000.
You spend a third of your income on shopping and you need to reduce this amount to about five to 10 per cent of your income to save at least Sh18,000 from this item of expenditure.
Evaluate your shopping habits and identify areas where you can cut back. Try to cook at home more often, limit your meals and avoid impulse buying.
You spend 20 percent of your income to pay school fees for your wife and daughter. If you transfer your daughter to a cheaper school, you can save Sh4,000 per month, which is half of her fees. Look for ways to reduce water and electricity use.
While supporting your parents and siblings is commendable, you should always ensure that it is within your means. Have an open conversation with your dependents about their financial situation and consider alternative ways to support them without adding to their financial burden.
Now, you spend Sh8,000, which is eight per cent of your income on maternity care and sibling university, popularly known as “black tax”.
Although there is no recommended amount of black tax, I recommend that you dedicate no more than five percent of this income and maintain this discipline so that you can save Sh3,000 from this expense category.
You should consider cutting your Wi-Fi costs by more than half so that you can save at least Sh1,000 a month unless you need internet to manage remote work.
Your spouse must be involved in some income-generating activity in order for you to save 11 percent of your income to pay for school fees. The income your spouse will generate should help cover some of the family’s expenses.
Cost-cutting measures can save you about Sh36,000 per month. Based on your income, aim to save and invest at least Sh18,600.
I recommend that you set up an emergency fund that can take care of at least six months of living expenses in case of an unexpected accident. I would encourage you to invest your emergency fund in a money market fund.
Make sure you have enough insurance cover to protect yourself from unexpected expenses. Considering the financial pressure you are currently under, it is very important that you look for ways to increase your income.
This may include finding a higher paying job, taking on additional work, or improving your skills to increase your market value.
Prioritizing debt repayment is key, as it will allow you to direct more of your income into savings and investments. You should limit your monthly loan payments to no more than 30 percent of your net salary.
To manage your debt situation, you can consider debt consolidation. If you go this route, the consolidation should be from the Sacco so that you offset the shylock debt more punitive first. If debt consolidation is not possible, you should use the avalanche debt payment method.
This involves making minimum payments on all of your debts and then applying additional funds to the debts with the highest interest rates first. Because shylock loans are short-term and expensive, prioritize paying them off first.
Contact the bank to discuss restructuring the loan or extending the repayment period to reduce monthly payments. A personal loan of Sh700,000 with an annual balance interest rate of 18 per cent, payable over 36 months, requires a monthly payment of Sh25,500.
Make sure your loan payments don’t violate the “one-third rule,” which requires you to keep at least one-third of your salary after all deductions.
So retirement savings are part of your financial goals because retirement savings ensure a good life after retirement and also provide some tax benefits.
I would encourage you to start saving with Sacco and always remember to capitalize Sacco dividends to deposit to increase your debt and get high dividends next year.
Saccos are a good source of development loans as they can increase your loan amount by three times from your savings. Consider seeking advice from a financial advisor who can help you create a customized financial plan.
If you have money problems, send an email at (email protected) and leave your contact number. Money questions will be answered in this column.
