Financial Advice Published in Saturday Nation on 3rd Sept., 2022

Reader's Question

"I am a personal assistant at work and a single mother of 3 children. Only one is in school in class 7. I earn 56,000 net salary. Here is my budget: rent per month is 15,000, 2 bedroom househelp-6000, water-1500, electricity-2000, transport-5000, entertainment-3000 , shopping-10,000, school fees per month for my school going child-12,000. However, I have a co-op bank loan that deducts 25,000 per month which is expected to be cleared in 3months. What happens is that my expenses are too much so when co-op bank deducts 25,000 at the end of the month, top up the loan again to run for another 3 months. This has remained my cycle and I am just really tired of always paying this loan. By the 15th of the month, end up with no money and I start borrowing friends and colleagues to sustain my family. My second born is to begin school in January next year 2023 but I am not sure if i will be able to pay for his school. Am not able to save even a shilling... Please advice me so that I get out of this situation."

Expert Advice

Your financial report reveals that you are living far beyond your means. Your net salary is Sh56,000 yet your total expenditure is Sh79,500. This leaves you with a monthly budgetary deficit of Sh23,500. That is why you are trapped in a vicious cycle of debts particularly from regular bank top up loans and other bad debts from friends and colleagues for your family sustenance. Without the bank top up loan of Sh25,000, your total expenditure is Sh.54,500. To get yourself out of your financial mess, you need to carry out a comprehensive life style audit as illustrated below. 

1. Live within your means

 Take the bull by the horns and review your expenditure by cutting down on unnecessary over-expenditures especially on rent, shopping, school and entertainment fees.

i. Rent. You are spending Sh15,000 which is 26% of your net and 11% more than the recommended average of 15%. Relocate to a more affordable house within the vicinity or nearby estate where you can pay rent of around Sh8,000 and save Sh7,000.

ii. Shopping. Cut it down from Sh10,000 (18%) to around Sh7,000 (13%) and save Sh3000. Purchase foodstuffs in bulk and buy cereals in large quantities during the off season.

iii. Entertainment. Do away with this unnecessary expense and save Sh3,000.

iv. School fees. You are paying Sh12000 (which totals to Sh36,000 per term and Sh108,000 per year) for your Std.7 child which is too expensive and unaffordable considering your precarious financial position. Transfer your child to an affordable private or public primary school where you can pay not more than Sh6,000 per month and save Sh6,000. Besides, you need to take insurance education policies for your children especially the younger ones for proper financial planning of their future education. 

After a thorough review of your expenditure, you will remain with a disposable sum of Sh19,000. This amount can be used offset part of your budgetary deficit of Sh23,000 and remain with a balance of Sh4000 which you will have to clear from money obtained from friends or colleagues and refund them later. You should stop taking the bank loan in the following month so that your remain with a surplus cash flow of Sh25,000 plus disposable income of Sh19,000 obtained from reducing your expenses. Use part of this surplus, that is, Sh15,000 to a Sacco that will earn you dividends and give you loans for personal development or investment. Channel about Sh10,000 towards an interest-earning emergency saving account to cushion you against any unforeseen eventualities. The remaining amount may be used to start a passion business. 

2. Track your expenses

Form your report, you have acknowledged that your expenses are too much which means that some are not captured like transport, black tax or donations. This means that you have a problem tracking your money and you may not be knowing where every shilling goes. Record all your daily expenses in a small notebook, diary or mobile application. Do a weekly summation and monthly analysis in line with various expense items or vote-heads. This kind of record keeping helps you to track where every shilling goes, reduce on unnecessary or impulsive spending, help you budget appropriately and save more as per your financial goals. 

3. Borrow for investment purposes only

 Learn about debt management (how to make debts work for you and the difference between good debts versus bad debts). Do not borrow or go for a top up bank loan to fund your extravagant lifestyle because these monthly top-ups are very expensive and they drain your hard-earned money. Only borrow to invest in an income-generating project or business venture. You need to start saving in a Sacco and build a collateral for any loan you need. Sacco loans are far much better than bank loans for they are repaid on a reducing balance, earn you modest dividends and encourage the habit of saving. Learn to save and invest. Stop living from hand to mouth.

4. Start a passion business

Scan your environment and find out potential business opportunities for earning extra income. Ask yourself, "What else can I do apart from my job as a personal assistant? What special skills do I have that I can put into good use? Can I do baking of cakes, mandazi, chapati, or doughnuts which I can sell during my free time?_ Once you have identified your side hustle, you will be able to supplement your regular income and cater for your children's increasing fees demands, save and stop living from hand to mouth.

https://nation.africa/kenya/life-and-style/saturday-magazine/advice-i-earn-sh56-000-but-my-expenses-are-almost-80k-and-i-survive-on-loans-3935714