My name is Chris. I am 29 with a wife and a child. I earn 32,000 after tax but I have been stuck in debt. I have a loan with a Sacco of Sh40,000 ending January next year. I pay Sh3,600 monthly. I used that money to lease a shamba for four years. I have Sh17, 000 M-Shwari and Sh7,600 KCB M-Pesa which I pay monthly and re-borrow immediately. I also have a Sh1,000 hustle fund loan.
This is how I break down my salary: Sh8,000 house rent, Sh3,500 savings in the money market, Sh1,500 Sacco, Sh2,000 education policy, Food Sh5,000. I don't use fare to work and I don't need a lunch budget since I live near where I work and I am able to rush to the house for lunch. I have extra income from my small business which generates at least a profit of Sh300 daily on a bad day.
I had savings of Sh110,000 last year but I spent it to contribute to paying off my mother's hospital bill which had accumulated to a million. I also have a small shamba that gives me at least Sh1,000 weekly. I wanted to buy a car to do door to door delivery but it seems impossible with all the loans. Please assist me
Dominic Karanja, a financial planning and investments consultant.
Your expenditures (Sh47,700) exceed your income (Sh45,000), placing you in a financial deficit. You are caught in a debt cycle with M-Shwari and KCB M-Pesa. Although you save Sh3,500 monthly in MMF, your debt is currently costing you more than your savings yield.
Your small business and shamba generate approximately Sh13,000 monthly, representing a significant income source that can assist you in breaking this financial cycle if utilised effectively.
Your salary is allocated towards several fixed expenses, resulting in limited financial flexibility. Although the concept of using a car for door-to-door delivery is promising, your current debt and savings situation make it impractical currently.
Let us systematically develop a practical strategy to assist you.
Short-term plan (Next 6-12 months)
a). Re-evaluate savings
Adjust contributions to the money market fund by temporarily reducing them and redirecting this amount to repay debts. Once you have managed debts, you can restore your savings. For the next three months, reduce MMF savings from Sh3,500 to Sh1,000 to free up at least Sh2,500 monthly.
b). Restructure M-Shwari and KCB M-Pesa loans
Focus on repaying the high-interest debts from M-Shwari and KCB M-Pesa without re-borrowing. Use Sh2,500 from reduced savings and your shamba income (Sh1,000 weekly) totalling Sh6,500 per month to pay off these loans. You can clear the combined debt of Sh24,600 in about four months with consistent repayments.
c). Debt snowball method
Focus on paying off the smallest loans first, such as the Hustle Fund loan of Sh1,000. This amount can be cleared quickly with part of the business profit. Once this loan is cleared, use the available cash flow to address the next loan.
d). Reduce expenses
Review your budget every month and find areas to cut back.
e). Sacco loan plan
Continue making payments on the Sacco loan as scheduled. The loan is set to conclude in January next year, providing a definitive end date. Upon completion of this loan, refrain from obtaining another Sacco loan. Instead, allocate the Sh3,600 monthly payments towards increasing savings or investing in a business venture.
Mid-term plan (12-24 Months)
a). Grow business and shamba income
Focus on maximising the income from your small business and shamba, as these are valuable income sources. Look for ways to boost profitability, for example, for your business, consider diversifying your product offerings or exploring new markets and for your shamba, research higher-value crops or adopt improved farming techniques to increase yields and income.
b). Build an emergency fund
Aim to save enough to cover six months of living expenses over time.
c). Revisit car purchase plans
Postpone buying a car until you have paid off high-interest debts and established a solid emergency fund. A car comes with additional costs like fuel, maintenance, and insurance, which will strain your finances. Once your debts are cleared, start saving for a car.
Long-term plan (Beyond 2 years)
a). Diversify income streams
Explore additional ways to increase your earnings. This will help you build financial stability faster.
b). Invest strategically
Once you are debt-free, use your savings to invest in low-risk opportunities or grow your money market account further. This will help you build wealth over time.
If you have any money problems, or if you’d like advice on managing your finances, feel free to get in touch at [email protected].
