Reader's Question
Personal Financial Question
My name is Mary. I have debts which have spiraled out of control. I have a Sh. 1 million loan that I took at a micro finance institution to buy my personal use car. Informally, I have three debts of Sh. 200,000. Sh. 100,000 which I took from my sacco, Sh. 60,000 which I took from a shylock, and Sh. 40,000 which I took from four different mobile lenders. Every month, I get Sh. 100,000 pay in my bank account from my job. Out of this amount, I am deducted Sh. 30,700 as monthly repayment for the Sh. 1 million loan. I am also deducted Sh. 6,300 for the Sacco loan. I am however not repaying the shylock and two of the three mobile loans because my budget is full. The budget is as follows.
Rent: Sh. 30,000
Food: Sh. 9,000
Vehicle fuel: Sh. 10,000
Entertainment: Sh. 8,000
Electricity and water: Sh. 2,000
Mother’s monthly stipend: Sh. 4,000
The Sh. 1 million loan has a duration of 48 months. I have so far repaid two years. The sacco loan has a duration of 24 months. I have so far repaid 6 months. How do I get out of this debt hole?
My Financial Advice
From the Mary's financial records, the following can be deduced:
1. That she is in a vicious cycle of debts, formal and informal. Informal loans like Shylock and digital loans are not reflected in the payslip and usually charge higher interest rates than the banks making one highly indebted. Mary's debts are purely meant for consumption.
2. She has only one source of income which is overstretched by consumer-related expenditures.
3. She neither saves nor invests in any income generating activity. This implies that she lives beyond her means and will end up being poor if the situation is not urgently addressed.
4. She is probably single and can drastically cut down her living expenses to manageable levels in order repay the debts faster, save and invest more.
To get out of the trap and shame of debt, you can do the following:
1. Calculate your net worth (sum-total of assets minus liabilities/debts) in order to determine your real financial position. That is akin to looking at yourself in the mirror and seeing whether you like what you see in terms of knowing your true financial position before undertaking the second task.
2. Identify where your money goes by tracking and recording down your daily, weekly and monthly expenses. As a result, you'll know whether you're building your own industry or other people's factories.
3. Formulate a financial plan with clearly outlined short-term goals (one year), medium-term goals (2-5 years) and long-term goals (5 years and above).
4. Create a crisis budget to help you first get out of the huge debts before you start saving and investing. You can adopt the sample budget illustrated below.
i. Rent. Reduce the money you spend on rent from Kshs. 30,000 to around Kshs.15,000. You need to move to a different estate or rent an affordable bedsitter at around Kshs.10,000 and *save about Kshs.20,000* which will be channelled to repaying your mobile loans.
ii. Food. You can reduce expenses on food at Kshs.9,000 (which translates to Kshs.300 per day) to Kshs.5,000 and save Kshs.4,000. You can buy food items in bulk which can last for a month, carry packed lunch to save money spent for lunch.
iii. Vehicle fuel. You can reduce this expenditure from Kshs.10,000 to Kshs.5,000 and save Kshs.5,000. This is possible if you do not use your car daily to your place of work. You can use matatus in some cases or even turn your car from being a liability into an asset that generates income. You can use it for taxi business or doing a side hustle with it during your spare time in the evenings and weekends. You'll earn more money in return instead of relying on your salary alone.
iv. Entertainment. The amount you spend on entertainment (Kshs.8,000) is unnecessary considering your dire financial situation. You can reduce or do away with it completely so that you can have a disposable fund of Kshs.8,000 that can be used to repay the unpaid mobile loans.
v. Mother's monthly stipend. You can reduce it from Kshs.4,000 to kshs.2,000 and save kshs.2,000.
Once you follow the above suggestions, you will end up with a disposable income of Kshs.39,000 which can be utilised as follows:
1. Pay Kshs.20,000 to the Shylock loan of Kshs.60,000 and in three months you'll have repaid the principal amount and in about two months you'll have offset the accrued interest of around Kshs.36,000 assuming that the Shylock charges you 20% interest per month for three months (Kshs.12,000 × 3).
2. Use the remaining balance of your disposable income of Kshs.19,000 to repay the mobile loans amounting to Kshs.40,000. Assuming they averagely charge you 12% per month you'll have an accrued interest of Kshs.4,800 translating to a whopping Kshs.14,400 in three months. Your total mobile debt is around Kshs.54,400. Therefore, it will take you three months to clear the debt once you channel kshs.19,000 every month and you'll remain with some little balance at the end.
3. Once you've cleared your Shylock and mobile loans in three months , you'll remain with a princely sum of Kshs.39,000. You can use this money to reduce the debt repayment period of the Sacco and bank loans. For the Sacco loan of Kshs.100,000, increase the monthly repayment to Kshs.10,000 up from Kshs.6,300. In six months, you've already paid kshs.37,800 and you're remaining with Kshs.62,200 which can be cleared in in six months when you pay Kshs.10,000 per month.
4. Use the remaining balance of your disposable income of kshs.35,300 (kshs.39,000 - kshs.3,700 used for Sacco loan repayment top up)) to repay the remaining balance of your bank loan amounting to Kshs.823,200 (assuming that you're charged 14% interest per annum). In two years, you've paid around Kshs.736,800. The total amount payable for the bank loan is Kshs.1,560,000 (principal of Kshs.1,000,000 + interest of Kshs.560,000). You can decide to repay the balance in 16 months if you increase the monthly repayment to Kshs.50,700 up from Kshs. 30,700 by adding Kshs.20,000.
5. Use the remaining balance of Kshs.15,300 to save for emergency, retirement and investments. Use Kshs.10,000 to save in a Sacco of your choice which will earn you yearly dividends and act as collateral for any loan you take, save Kshs.5,300 with Money Market Fund for emergency purposes and save Kshs.5,300. Later on once you've cleared the bank loan, ensure that you increase your emergency fund savings as well as Sacco savings. Take at least two insurance policies (education of your children and life cover) and contribute to registered pension scheme besides what your employer provides.
Kind regards
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