Even while tackling debt, start building a small emergency fund.
I am 36 and single. I have an eight-year-old daughter who has been living with me upcountry with my parents. I have debts amounting to Sh1.6 million. Sh700,000 of this is from a bank loan that I have defaulted on for the past three months. The remainder is from assorted debts from family, siblings and friends. I had taken the bank debt to start a business and go back to school for my Master’s. However, the business did not do well and I started racking up additional debts from siblings and close friends. I found myself borrowing from Paul to repay Peter until I lost my job earlier this year and started defaulting. I went broke and moved back upcountry with my parents. I have ruined relationships because of my non-payment. However, I recently secured a job that will pay me a net of around Sh70,000 per month. I would like to pay off these debts within the next two years. I would also like to support my mum who is currently helping me with my daughter. I don’t know how to budget and I am afraid of messing up again. How should I budget for the debt repayments? What allocations should go to rent, food, transport, entertainment, savings, emergency, my mum and daughter's support? Tim
Dominic Karanja is a financial planning and investments consultant
With an objective to settle Sh1.6 million debt over the next two years while maintaining essential expenditures and preventing financial missteps, implement a strict budgeting strategy. You need a comprehensive and structured financial plan which prioritises debt repayment while ensuring coverage of fundamental needs.
To repay Sh1.6 million over 24 months, you need monthly payments of approximately Sh66,667 plus interest. This amount represents nearly your entire salary and leaves limited funds for living expenses.
Consider extending the repayment period or negotiating with creditors for more manageable terms, particularly for the Sh700,000 bank loan that may be incurring penalties due to default. Contact the bank to discuss possible loan restructuring, such as extending the repayment term or reducing monthly instalments to avoid further consequences like asset seizure.
For the Sh900,000 owed to family and friends, communicate openly, explain your current employment status, and propose a structured repayment plan, even if initial payments are small, to maintain trust. Allocating a substantial portion of income to debt repayment should also take into account necessary living expenses and support for dependents.
Allocate Sh30,000 towards debt repayment, representing approximately 43 per cent of your monthly income. Of this amount, designate Sh15,000 for the bank loan to demonstrate good faith and progress toward settling the outstanding balance of Sh700,000.
Direct the remaining Sh15,000 towards debts owed to family and friends, prioritising those that are most urgent or where relationships may be adversely affected.
This approach equates to an annual repayment of Sh360,000, indicating that clearing the full Sh1.6 million debt may require approximately four and a half years, unless future salary increases or additional side income allow for larger payments.
Allocate Sh15,000, representing 21 per cent of your income, to cover rent expenses. In Nairobi, a modest one-bedroom apartment in a suitable neighbourhood typically ranges from Sh12,000 to Sh15,000.
This allocation ensures housing remains affordable while providing a secure environment for you and occasional visits from your daughter.
For food, designate Sh10,000 (approximately 14 per cent of your income) towards groceries and occasional dining out. Preparing meals at home such as buying in bulk and meal prepping can help manage costs effectively while allowing for nutritious meals within your budget. Set aside Sh7,000 (around 10 per cent of your income) for transport.
Utilising Nairobi’s public transport system (matatus and buses) generally costs Sh50 to Sh100 per trip. With daily commuting in mind, budget Sh5,000 for work-related travel and an additional Sh2,000 for other activities such as family visits or errands. If your workplace is far, consider residing closer to reduce transportation expenses.
Allocate Sh5,000 (approximately seven per cent of your income) to cover your daughter’s requirements such as school supplies and clothing and provide assistance to your mother, who is overseeing her care.
Consult with your mother to identify specific needs and adjust the amount as necessary based on changes in financial circumstances.
Even while tackling debt, start building a small emergency fund. Any surplus income remaining after essential expenditures ought to be allocated either toward reducing debt or establishing a modest emergency fund.
Once liabilities have been brought to a manageable level, you may increase your savings contributions. Set aside Sh2,000 (approximately three per cent of your income) each month in a designated savings account or through a mobile money platform for unforeseen emergencies, such as medical costs or unexpected travel.
This precautionary approach helps minimise the risk of incurring additional debt.
Limit entertainment expenses to Sh1,000 per month for occasional social activities or minor personal purchases. This strategy allows for controlled discretionary spending while maintaining overall budgetary discipline.
It is important to exercise strict oversight in this category, as it is a common area where budgets are exceeded.
Consider restricting outings, seeking free or low-cost entertainment options, and prioritising essential personal care items.
To ensure effective implementation, monitor all expenditures using a spreadsheet or budgeting app, and conduct weekly reviews.
Avoid lifestyle inflation by maintaining current spending levels, even if income increases. Pursuing additional income opportunities may also help accelerate debt repayment.
Considering previous challenges with budgeting, it is important to proactively address any weaknesses and seek further education on personal finance.
Recognising milestones, such as repaying an individual debt, can support continued motivation throughout this process.
