Financial Advice Published on Saturday Nation on 30th July, 2022 Reader's Question
Reader’s Question
"My name is Johnstone. I'm 43 and a civil servant working in Nairobi earning a gross pay of Sh225,000. But I have not been able to save good money. I have become a slave to bank loans, I have tried some business but it fails, though I have invested. I leave in my own house worth Shs7.5 million inclusive of plot, I have another plot worth Sh3.5M within Nairobi metropolis which I want to dispose to settle loans to increase my net in order to enable me save more, and land worth Sh1.7 million where I do farming (maize and beans). My headache is 1. Bank loan balance Sh3.7 million paying Sh96,000 a month, 2. Saving Sacco loan paying Sh34,000 a month, 3. Sacco loan Sh35,000 paying Sh9,000 per month. Saving Sacco Sh700,000 at Sh5,000 per month, education insurance Sh5,000 per month, NSSF Sh1,000 per month. Expenditure on rent zero, travelling/fuel Sh15,000, house shopping Sh15,000, electricity Sh2,500, airtime/data Sh3,000, TV subscriptions Sh1,200, entertainment Sh5,000, others/miscellaneous/parents/siblings support Sh7,000, children school fees Sh240,000 per year. I don't have emergency savings. My account is zero. How can I manoeuvre myself through this? Thank you. Yours reader.”
Response
At age 43, you are left with 17 years to reach the mandatory
retirement age of 60 years as a civil servant. This ideally implies that you
have reached a critical middle-age bracket (40-50 years) which is usually known
as stage of stabilization after transiting from the take-off stage (30-40
years). If not we'll handled, it can become what psychologists call the
"age of mid-life crisis," the time of serious reckoning in ones' life
journey.
An examination of your financial breakdown reveal that you are
highly indebted, have no emergency savings despite earning a decent salary, you
pay exorbitant schools fees and you lack asset diversification. In as much it's
laudable to have taken an education insurance policy, it is still inadequate if
you have more than one child. The amount stated is enough monthly premiums for
just one child depending on the duration and sum assured.
You need to formulate a versatile five-point financial
management plan anchored on the following strategies.
1. Review your financial position and expenditure
Your check off deductions, (including 30% PAYE of Shs.67,500,
NHIF Shs.1,700) totals to Shs.185,200 leaving you with a net pay of Shs.
39,800. You expenditure totals to Shs.48,700 excluding a colossal sum of
Shs.120,000 spent on school fees which translates to a total of Shs.168,000.
This means that you are living far beyond your means. You are definitely
relying on borrowing/loans to pay fees because your net pay is cannot sustain
it.
Do you know where every shilling goes per day, week and month?
Tracking your expenses will help you cut down on unnecessary expenses and
increase savings for investment. You are saving a meagre amount of Shs.5,000 in
a Sacco which translates to 2% of your gross pay instead of the bare minimum of
10%. Your education insurance is also a measly percentage of 2% instead of at
least 10% of the gross pay.
You need to have in place some austerity measures that can help
you reduce your expenditure as follows:
a) Travelling expenses. Reduce it from Shs.15,000
(37% of your net) to around Shs.8,000 (20% of the net) and save Shs.7,000. You
may decide to travel sometimes by matatu during off peak hours and at times do
car-pooling to save much more.
b) House shopping expenses. Cut it
down from Shs.15,000 to around Shs.10,000 (25% of net) by doing bulk shopping
of foodstuffs like cereals, cooking oil, sugar etc. You will be left with
Shs.5,000 disposable income.
c) Entertainment. Cut it from Shs.
5,000 to around Shs.2,000 and reaming with Shs.3,000 disposable income.
d) Miscellaneous expenses. Reduce
this unnecessary expense from Shs.7,000 to around Shs.4,000 and save Shs.3,000.
In total, you will be able to have Shs.18,000. This amount can
be channelled to a money market fund earning a modest compound interest of
8-12%. This will serve as an emergency buffer to cushion you during times of
dire need.
2. Debt management
It is important to note that it will take three and half years
to clear your bank loan. As for the Sacco loan, it will take you three years
and 10 months. This implies that unless you diversify your sources of income
you will not save much. Remember it is difficult to dispose off a fixed asset
such as land. Therefore, to sell your plot worth Shs.3.5M in Nairobi may take
longer than expected making it difficult to get money to clear the bank loan.
If you become so desperate, you may dispose your plot at a much lower price
than its real market value. Meanwhile, do not sell the land which you use for
farming as this provides your most realistic source of additional income.
If you do not want to run the full loans repayment period, you
may, in the interim, use the money obtained from reduction of expenses
(Sh18,000) to increase the monthly repayment. You should consider putting the
Sh3.5 million plot on sale with a sell-by date of about three months. Proceeds may
be enough to defray the remaining loan balance. Once that is done, readjust
your financial outlay by establishing an emergency fund equivalent to 3-6
months’ average monthly expenditure, increasing Sacco savings to about 20% of
the grass, and increasing insurance premiums to about 20% of your salary.
3. Increase your investments on your children's education
It is advisable that you that you take an education policy for
every child you have. Remember, children are not an emergency because you have
to plan how to get them and as such plan from for their medical, upkeep and
education expenses as they grow up. As your finances improve, you need to raise
your education policy from Shs.5,000 to Shs. 20,000.
4. Diversify your investments
To reduce over-dependence on salary, you need to scan your
residential environment and find out the kind of business you can do best.
Besides growing maize and beans, you can make optimum use of your land to plant
three-month-long crops like peas, carrots, onions, veges etc. instead of maize
which takes almost 7 months. You can also put up a zero-grazing unit for a cow
or two which will make you produce milk for domestic and commercial purposes.
5. Write a will and make retirement plans
This something that many people deliberately ignore. It is advisable to plan on how your estate will be managed and shared among your next of kin in the event of your demise, God forbid! Decide on when you want to exit employment instead of waiting for the mandatory retirement age of 60 years. You need to invest on acquiring financial literacy, and get a good financial coach who will guide in your financial journey.
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