'I earn Sh180,000 net but I’m always broke and taking monthly loans'

My name is James. I earn a net pay of Sh180,000 per month. My monthly expenses are as follows:

• Rent: Sh44,000
• Car loan: Sh21,010 (remaining repayment period of 20 months).
• Traveling: Sh10,000
• Electricity: Sh6,000
• Household Shopping: Sh20,000
• Water: Sh2,000

I also send cash to my parents in the village. My problem is that I have never managed to save anything however much I try. Recently, I have found myself borrowing mobile loans that currently stand at Sh20,000. What do I need to do to attain prudent financial management and stop struggling despite earning a decent salary? How do I start saving? How do I redefine my budget? Please help.

Chacha Nyaigoti Bichang’a, a financial coach at Chachanomics Consulting Firm and the author of Mastering Your Money

Your expenses total Sh103, 010 but your net pay is Sh180,000. This means that about Sh77,000 is unaccounted for. Suppose you spend Sh7,000 on your parents, the total expenditure would be Sh110,010. There is a huge wastage of your net pay which is more than Sh70,000. This money is probably spent on repaying mobile loans and entertainment. The problem is not about having insufficient money (as many people wrongly believe) but your beliefs about money and wealth creation which greatly influence your spending habits. To attain prudent financial management and stop struggling financially, you need to adopt three fundamental financial strategies.

Acquire financial literacy skills: Enroll in a course on personal financial management or hire the services of a financial coach who will teach you skills on how to identify your big why, budget, debt management, saving, and investing.

Live within your means: You need to spend less than what you earn. Track where every shilling goes (by recording expenses daily, doing weekly and monthly financial analysis) and reduce wastage by cutting down certain expense items.

Budgeting: Apply the 80/20 rule to determine your financial allocations. This rule requires that you pay yourself first before you pay other people or spend on other items. 

Here’s a simple guide on how much should go to every expense item: 

Saving (20 percent): Channel Sh18,000 (10 percent) to your savings account in a money market fund and Sh18,000 (10 percent) to a Sacco. The money saved in a money market fund will be used as an emergency fund. If you save consistently for at least three years, you will realize Sh648,000 plus compound interest/profit of about Sh60,070 at 9 percent interest per annum (totaling to Sh708,067). The Sacco Savings will translate to Sh648,000. The benefits of Sacco savings are mainly two-fold: you will earn modest dividends at a rate of about 10 percent annually and the deposit will act as collateral for acquiring a loan (for investment) of about Sh1.94 million which is three times the amount you'll have saved. 

Rent (15 percent): Your rent of Sh44,000 translates to a high of 24 percent. This should be reduced to Sh27,000 or even less by moving to a cheaper house. You will be able to save Sh17,000 which can be used to increase the car loan repayment amount per month to Sh38,010 and reduce the period to 11 months.

Travelling (10 percent): You are spending Sh10,000 which is six percent of your net pay, which is fine. 

Utilities (5 percent): Try to reduce the consumption of electricity from Sh6,000 to about Sh4,000.

Household shopping (20 percent): You’re spending Sh20,000 which is 11 percent of your net pay. Still you can try to reduce wastage on unnecessary household goods. 

Parents (5 percent): Spend a maximum of Sh7,000 (4 percent). 

Miscellaneous (5 percent): Set aside Sh.9,000 for emerging or other unplanned expenses.

The above expense allocations including loan repayments total to Sh138,010 leaving you with a balance of Sh41,990. This is still a big balance that can be spent prudently to repay the digital loans and break the monthly cycle of debt.

Paul Muhami, the managing director of financial advisory firm, Empower Financial Advisors Ltd.

Your current expenditure is Sh103,000.00 a month. This means that you have Sh77,000.00 which you aren’t able to account for, most probably due to an unhealthy entertainment lifestyle. Note that this Sh77,000.00 is what is topped up by a recurrent Sh20,000.00 monthly mobile loan. Start working with a budget and track where this money is lost. A budget will restrict your spending and allow you to separate what is necessary and what isn’t. 

You are spending much more than you should. The fact that you spend Sh20,000.00 on shopping monthly points to the possibility of impulse purchases. Budgeting for shopping alone will save you Sh10,000 which you can use to permanently settle your mobile loans within two months. Remember that other than staying stuck with mobile loans, you pay the highest interest rate in the lending market. Once the mobile loans are paid off, divide the Sh10,000 into two. Save Sh5,000 for emergencies every month and the remainder for miscellaneous expenditures. Mark you, partying is not a necessary miscellaneous expenditure. 

Spending Sh6,000 on electricity is on the higher side. Cut this by 50 percent by moving to a cheaper house. 

Relocate to a more affordable house. If you slash your rent from Sh44,000 to Sh25,000, you will save Sh19,000 which will be equivalent to Sh228,000 savings per year. This money should be saved in a money market fund that will earn you at least 10 per cent compounded interest.

From your net salary, your gross salary is at least Sh250,000, meaning that at least Sh25,000 should be going into a Sacco savings account. Saccos provide the most excellent way of passively building wealth, because they allow you to consistently build your kitty as well as pay you an annual dividend, which ideally, you should compound, and also allow you to borrow with the 3X multiplier for assets. Open a Sacco account immediately (but do your due diligence on the right kind of Sacco). 

Arrange either a check off system with your employer or a standing order with your bank for savings. This will remove the temptation to postpone remitting your monthly savings. 

If you have any money problems, send us an email via: [email protected]. Your questions shall be answered on this page.