Help, I am drowning in credit card and mobile loans!

My name is David. I am 30, married but with no children. A few months ago, I was made redundant. I became desperate financially as I had no backup. I got into debt, including mobile loans which were a nightmare due to frequent recovery calls. I now have a Tala loan of Sh6,000 and a Zenka loan of Sh3,000; credit cards in 2 banks with debts of Sh28,000 and Sh74,000 respectively; Sacco loan balance of Sh76,000. I recently got a job with net pay of Sh54,000. My expenses are as follows: rent Sh8,400, wifi Sh2,000; airtime Sh1,000; tokens Sh1,000; transport Sh5,000; food Sh8,000; shopping Sh5,000; chama savings Sh2,000; entertainment Sh6,000; MMF Sh3,000; Sacco loan Sh6,800; miscellaneous Sh2,000. I would love to clear my loans soonest possible, especially my credit cards. Lastly, I have a 1/8 plot where I'd like to erect bedsitters in future to bring passive income. How do I go about all this?

Dominic Karanja, financial planning and investment consultant

The first step is to get out of debt. Your monthly expenses add up to Sh50,200 which is 93 per cent of your net income. You currently have several expensive loans, and you need to prioritise their repayments. Since you only have an extra Sh3,800 from your monthly net income, you will have to reorganise your monthly budget to manage debt repayments. Consider debt consolidation. Taking a personal loan to consolidate your debts can ease your debt repayment burden through affordable loan instalments. It’s recommended that you don’t spend more than 15 per cent of your net income on consumer debt thus you can currently commit about Sh8,100 towards your debt repayment. 

Your current outstanding loan balance stands at Sh187,000 and if you secure a SACCO loan of that amount at a rate of 12 per cent annually you can clear the loan in two years with monthly instalments of Sh8,802 (assuming that you have saved more than Sh63,000 in your SACCO). The loan instalment amount is a bit higher than the recommended amount because your monthly income will need to increase with time. If debt consolidation is not possible, you will need to adopt a debt avalanche repayment method where you will be making minimum payments on all your debts, and then use the remaining money to pay off the debt with the highest interest rate. To come up with a realistic budget, I would recommend that you apply the 50:30:20 budgeting rule where your net pay will be allocated as follows; 50 percent for yours needs, 30 percent, wants and 20 percent, savings and investments. You are spending 65 per cent of your net income on needs, Sh10,000 monthly on wants (Internet, entertainment and miscellaneous expenses) and saving Sh5,000 which is 9 per cent of your monthly net income. 

I would recommend that you spend 15 percent of your net income on your food and shopping thus saving Sh4,900 monthly.  Lower entertainment to 5 percent of your net income to save Sh3,300. Consider reducing your Internet and airtime expenses by half to save Sh1,500 monthly. Based on your income the target saving and investment should be at least Sh10,800.

Because of the high cost of living, the food and shopping might require supplementation from an extra income from your wife. This could be from her salary if she is working or from a casual part-time hustle. With growing your family, a possibility, you both need to have a minimum of one income stream each. These will help you get out of debt without impacting your family, after which you can boost your Sacco savings with a medium to long-term development target for your plot. 

With this, you will need to add your Sacco savings to increase your borrowing power and earnings. Also, convert your MMF into an emergency fund and accelerate savings as your financial position improves to have a buffer that can cushion you for six months.

If you have any money problems, send us an email at [email protected] and leave your number for contact. Money questions will be answered in this column.