Chachanomics Financial Advice Published on Saturday Nation 04/06/22
I Earn a Net Pay of Sh.180,000 but I'm Always Broke and Taking Loans
I
earn a net pay of Sh.180,000 net but I'm always broke.
My monthly expenses are as follows:
Rent 44,000
Car loan 21,010 which need to repay in 20 months.
Travelling 10,000
Electricity 6,000
Household Shopping 20,000
Water 2,000
I also send some upkeep cash for my parents in the village.
Problem is; I have never managed to save anything however much I
try. Recent, I found myself borrowing mobile loans that currently stands at
20,000.
What do I need to do to attain prudent financial management and
stop struggling despite earning a decent salary?
How do I start saving? How do I redefine my budget? Please help.
Chachanomics Financial Advice
From the above financial situation, I have
observed the following.
1. The breakdown of expenses is incomplete
because it totals to Sh.103,010 yet your net pay is Sh.180,000 which means that
about Sh.77,000 is unaccounted for. Suppose you spend Sh.7,000 on your parents,
the total expenditure would be Sh.110,010.
2. There is a huge
wastage of your net pay which is in the upwards of Sh.70,000. This money is
probably spent on repaying mobile loans amounting to Sh.20,000, entertainment
or many other unlisted expenses.
3. Despite
acknowledging that you earn a decent salary, you've indicated that you're
unable to save. This implies that the problem is not about having insufficient
money (as many people wrongly believe) but your beliefs about money and wealth
creation which greatly influence your spending habits.
To attain prudent
financial management and stop struggling financially, you need to adopt three
fundamental financial strategies.
1. Acquire financial literacy skills. This means that you need to enroll for a course on personal
financial management or hire the services of a financial coach who will teach
you skills on how to identify your big why (your definite purpose in life and
what you want to achieve), budget, manage debts, save and invest prudently. A
financial coach will dissect and diagnose the reasons that make you spend money
the way you do and prescribe appropriate measures which you can take in order
to improve your financial situation. Unless you educate yourself money-wise,
you won't understand the primary root cause of your financial habits and
extravagant expenditures.
2. Living within your means. You
need to spend less than what you earn and learn to use your salary as a seed to
be planted in order to save and invest. You need to track where every shilling
goes (by recording expenses daily, doing weekly and monthly financial analysis)
and reduce wastage by cutting down certain expense items as illustrated in the
spending plan provided below.
3. Budgeting. To spend your money
wisely, you need to apply the 80/20 rule to determine your financial
allocations. The rule advocates for paying yourself first before you pay other
people or spend on other necessary items. As soon as your salary hits your
account, channel 20% of your salary to savings ( for investment and emergency).
The remaining 80% can be further broken down to 50% (for the necessary
expenses) and 30% (for wants or not very essential expenses).
The 50% for the necessary expenses can be
further broken as follows: household shopping including food (20%), rent (10%)
travelling (10%), utilities (5%), and parents etc (5%).
The remaining 30% which
may used for wants such as entertainment, donations/building social capital,
gadgets, household accessories etc. or can be reduced to 20% or 10% in order to
meet one's financial goals.
By applying the above budgeting guideline,
the following is a simple guide on how much should go to every expense item
a) Saving (20%). This should be the
first priority expense before anything else is done. This can be done done in
two main ways: you should channel Sh.18,000 (10%) to your saving account in a
money market fund and Sh.18,000 (10%) to a Sacco. The money saved in a money
market fund will be used as an emergency fund to cushion you against any unforeseen
eventuality. If you save consistently for at least three years, you will
realise Sh. 648,000 plus compound interest/profit of about Sh.60,070 in case
the money earns 9% compound interest per annum (totalling to Sh.708,067). On
the other other hand, the Sacco Savings will translate to Sh.648,000. The
benefits of Sacco savings are mainly two-fold: you will earn modest dividends
at a rate of about 10% annually and the deposit acts as collateral for
acquiring a loan (for investment) of about Sh.1.94M which is three times the
amount you'll have saved.
b) Rent (15%). Your rent payment of
Sh. 44,000 translates to a high of 24%. This should be reduced to Sh.27,000 or
even less by moving to a cheaper house in the vicinity. You will be able to
save Sh.17,000 which can be used to increase the car loan repayment amount per
month to Sh.38,010 and reduce the period to 11 months.
c) Travelling (10%). You are spending
Sh.10,000 which is 6% of your net pay and it's needless to adjust it downwards
or upwards.
d) Utilities (5%). You're spending a
cumulative total of Sh. 8,000 which is less than 5% but you can still try to
reduce consumption of electricity from Sh. 6,000 to about Sh.4,000 depending on
electric gadgets you're using.
e) Household shopping
(20%). You are spending Sh. 20,000 which is 11% of your net pay and this looks
manageable depending on the size of your family. Still you can try to reduce
wastage on unnecessary household goods.
f) Parents (5%). You have not specified
the amount you send to parents but assuming you spend Sh.7,000 (4%) that may
not be a lot especially if you've employed somebody to help them with domestic
chores.
g) Miscellaneous (5%). You can set aside
Sh.9,000 for emerging or other unplanned for expenses
The above expense
allocations including loan repayments totals to Sh. 138,010. This implies that
there is a remaining balance of Sh. 41,990. This is still a big balance which
can be spent prudently to repay the digital loans and reduce the loan repayment
period.
Lastly, you can start a
business venture with your car because as it stands it's a liability. You can
put it in a tax business like Uber so that it can generate some money to enable
yourself break free from the yoke of debts. You may use the proceeds to clear
the mobile loans and boost your savings for investment purposes.
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