Help! I am unable to pay debts of Sh1.2 million despite earning Sh100,000 monthly

My name is Mary. I am a single career woman aged 30. I have debts which have spiraled out of control. I have a Sh1 million loan that I took at a micro finance institution to buy my car. Informally, I have three debts of Sh200,000. Sh100,000 which I took from my Saco, Sh60,000 which I took from a shylock, and Sh40,000 which I took from four different mobile lenders. My monthly salary is Sh100,000. Out of this amount, I am deducted Sh30,700 as monthly repayment for the Sh1 million loan. I am also deducted Sh6,300 for the Sacco loan. I am however not repaying the shylock and two of the three mobile loans because my budget is full. The budget is as follows.

Rent: Sh30,000

Food: Sh9,000           

Vehicle fuel: Sh10,000

Entertainment: Sh8,000

Electricity and water: Sh2,000

Mother’s monthly stipend: Sh4,000

The Sh1 million loan has a duration of 48 months. I have so far repaid two years. The Sacco loan has a duration of 24 months. I have so far repaid 6 months. How do I get out of this debt hole?

Chacha Nyaigoti Bichang’a, personal finance coach and author of Mastering Your Money

It is clear that your debts are purely meant for consumption. Also, you have only one source of income which is overstretched by your consumer-related expenditures. Currently, you are also not saving or investing. This implies that you live beyond your means. Being a single woman can allow you to drastically cut down your living expenses to manageable levels in order to repay your debts faster, save and invest more. Start by calculating your net worth to determine your real financial position. This is the sum-total of your assets minus liabilities/debts. Identify where your money goes by tracking and recording down your daily expenses. Formulate a financial plan with clearly outlined short-term goals (one year), medium-term goals (2-5 years) and long-term goals (5 years and above). Then create a crisis budget to help you first get out of the huge debts before you start saving and investing. You can adopt the sample budget illustrated below:

Rent: Reduce the money you spend on rent from Sh30,000 to around Sh15,000. You need to move to a different estate or rent an affordable house.

Food: Reduce expenses on food at Sh9,000 (which translates to Sh300 per day) to Sh5,000 and save Sh4,000. Start buying food items in bulk which can last for a month, and carry packed lunch to work to save money spent for lunch.

Vehicle fuel: Reduce this expenditure from Sh10,000 to Sh5,000. This is possible if you do not use your car daily. You can use public means and use it for taxi business or for doing car boot side hustles. This will give you extra income other than your salary.

Entertainment: The amount you spend on entertainment (Sh8,000) is unnecessary considering your dire financial situation. You can reduce or do away with it.

Mother's monthly stipend: Reduce it from Sh4,000 to Sh2,000.

From these cuts, you’ll end up with disposable income of Sh39,000 every month which you should use as follows:

Pay Sh20,000 to the Shylock loan of Sh60,000 and in three months you'll have repaid the principal amount, and in about two months you'll have offset the accrued interest. Use the remaining balance of your disposable income of Sh19,000 to repay the mobile loans amounting to Sh40,000. Your total mobile debt would be around Sh54,400. Within three months, you’ll be able to clear your mobile debt and remain with Sh3,000. Once you clear these debts, use the Sh39000 to reduce the debt repayment period of the Sacco and bank loans. For the Sacco loan of Sh100,000, increase the monthly repayment to Sh10,000. 

Use the remaining balance of your disposable income of Sh35,300 to repay the remaining balance of your bank loan amounting to Sh823,200 (assuming that you're charged 14 percent interest per annum). In two years, you've paid around Sh736,800. The total amount payable for the bank loan is Sh1,560,000 (principal of Sh1,000,000 + interest of Sh560,000). You can decide to repay the balance in 16 months if you increase the monthly repayment to Sh50,700. Use the remaining balance of Sh15,300 to save for emergency, retirement and investments. Sh10,000 to save in a Sacco and Sh5,300 with Money Market Fund for emergency purposes. Later on, once you have cleared the bank loan, ensure that you increase your savings.

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Robert Ochieng’, Investment and Financial advisor at Abojani Investments

Mary, 37 percent of your salary goes towards loan repayments and a further 30 percent goes into rent. You are paying too much for rent. Ideally, you should pay no more than a quarter of your monthly salary for rent. Relocate to cheaper places where you can pay Sh20, 000. Your bank loan went into the purchase of a vehicle, and that's more of a convenience tool rather than a business. You are already spending 10 percent of your salary on fuel, which should have gone into an emergency fund. Do not consolidate your debt. Consolidating will force you to repay with higher interests.

Consider carpooling with neighbours or reduce your car use frequency. Reduce car trips to save at least Sh5,000 on fuel. If you cut Sh5,000 on rent, you’ll now have Sh10,000 spared. Use this amount to clear the shylock and mobile lenders' loans within 10 months. The bank and Sacco loans can run their course until after you complete the shylock and mobile loans. Once clear, top this amount on your monthly bank and Sacco loan repayments. 

In this case, your objective is to comfortably settle the loans without overly distorting your lifestyle. Since you don’t have an emergency fund, consider cutting your entertainment budget by half and create Sh4,000 monthly fund. Save this money in a money market fund. You may also consider selling your car for now and reinvest the money in passive investment vehicle such as Bonds or the Money Market, especially because you currently have zero income earning assets. Your vehicle is depreciating without generating any real income. Down the line, there are economic vehicles you may reconsider when your financial status stabilises.

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