My name is John. I live in Kiambu County and have been employed in a permanent and pensionable position for three years. My net salary is Sh37,000 but after deductions, I take home Sh16,000 only. These deductions are the result of loans as follows. Loan 1: Sh400,000 – I have three years remaining on payments. Loan 2: Sh750,000 – five years remaining. Loan 3: Sh150,000 – three years remaining. I feel like I have made mistakes, as I can't show anything tangible that I have done with the loans. My wife is an intern teacher with Sh17,000 net salary. She has been helping with the bills but we are both totally drained because of the loans I took. My wife is considering taking a Sh250,000 loan with a duration of five years from a micro lender to start a business and I am not sure if this is the right strategy because I am already neck deep in debt. They say her instalments will be Sh8,000 per month. Is this a good move? How do we organise ourselves and our budget to get out of this debt hole and reap the fruits of our labour?
Chacha Nyaigoti Bichang’a, a financial coach at Chachanomics Consulting Firm and the author of Mastering Your Money
The biggest personal financial problem you face is the trap of debt as portrayed by huge debt obligations.
Most of your income is locked in loan repayments, whose net gain is unknown because you have not indicated the purpose for which you took the loans.
The second challenge is the lack of financial discipline as demonstrated by lack of a clear breakdown of expenses and a budget.
This implies that there are some leaks in your day-to-day expenses that go unnoticed on account of the inability to track where every shilling goes.
Despite the enormous debt burden, your wife is considering taking a loan of Sh250,000 for five years with a monthly repayment of Sh8,000. This has a huge financial implication that will worsen your financial situation.
You will be left with Sh25,000 for your combined family recurrent expenditure such as rent, food, school fees, transport and the like.
To start a new business with borrowed money is a high-risk venture, especially since the loan will be obtained from a Shylock or micro lender with exorbitant interest rates ranging from 30 to 40 per cent annually.
Not to mention hidden deductions from the actual principal amount you get, which shylocks and micro lenders have become notorious for.
If the business does not thrive in the first two years, you will be plunged into a deeper vicious cycle of debts that will make you depressed and financially insolvent.
As they say, kukopa harusi kulipa matanga. With shylocks and micro-lenders, that quarter-million loan can balloon into many millions within the twinkling of an eye.
Note that if she takes the loan, your wife’s monthly take-home will reduce to just Sh9,000 which will make it even harder to survive.
The million-dollar question is, how do you handle the imminent debt crisis? There are two critical concerns – the colossal sum of your current debt obligations totalling Sh1.3 million that erode the disposable income for saving and investment, and the high monthly instalments of Sh8,000 for your wife's anticipated five-year loan.
To get out of the trap and shame of debt, consider restructuring the existing loans. Approach your Sacco, if you have any, bank or employer-based lender to ask about loan refinancing or consolidation.
Combine the three loans into one long-term loan with lower interest and manageable monthly repayments. This will ease the monthly financial strain. Tame the desire to go for another loan using your wife's salary.
Agree with your wife that no one should take a loan without discussing and agreeing on the repayment implications. Practise financial fidelity. Do an introspection of the debt triggers and address them accordingly.
Instead of going for a Sh250,000 loan, consider starting a small business that requires less than Sh20,000 such as selling eggs, selling second-hand clothes, rearing some chicken, and engaging in digital side jobs. You may use part of your savings or income from gigs or side hustles.
Embrace the culture of financial discipline. Track where every shilling goes on a daily, weekly and monthly basis by drawing a detailed financial statement of the income and expenditure. Once you do this consistently for three months, you will establish a realistic budget that will act as your spending plan.
Hold a candid conversation with your wife and write down your monthly living expenses. Identify areas to reduce overspending like Cable TV subscriptions, eating out, unnecessary purchases and such
. Learn to use the 50/30/20 budgeting framework for your net income. Spend 50 per cent for necessary living expenses, 30 per cent for savings for emergencies and investment, whereas 20 per cent should be channelled towards wants or discretionary expenses.
As your financial situation improves, increase allocations for saving and investment, but not for upgrading your lifestyle. Set SMARTER financial goals ranging from short-term, medium-term to long-term specific objectives.
Establish an emergency fund. Try to save as little as Sh500 or Sh1,000 per month in a compound interest-earning financial vehicle.
This fund will cushion you from rushing to Shylocks or digital loans when unforeseen eventualities arise. Aim at setting up an emergency buffer by saving at least six months' worth of your recurrent monthly expenditure.
Acquire financial skills to change your consumerist and scarcity mindset. As a couple, you need to be intentional about gaining personal financial education regarding debt management, monitoring your money, budgeting, saving and investing strategies, among others. Enroll for financial coaching, mentorship and training.
Your financial management skills will improve within three to five years and your debts will be cleared, you will save and invest in more profitable ventures and ultimately attain financial freedom.
