I earn Sh120,000 but always broke a week after being paid

My name is Eunice. I am a single mum of one child in Grade Four. I live in Nairobi. I earn Sh120,000. I own two plots upcountry and a car that I use to travel to work and weekend outings. I am servicing a Sacco loan with monthly deduction of Sh29,000. The loan balance is Sh650,000.

My monthly expenses average Sh100,000 inclusive of loan repayment. My savings account has Sh15,000, and Sacco shares Sh500,000. A week after my salary hits the bank, I am left with Sh5,000 which hardly gets me through the month. I get into debt to get through the month.

I have no emergency fund and I would really wish to own a home and stop paying rent. I would also like to get my child out of public school and get her a good private education. How do I get my finances in order?

Dominic Karanja - Financial and Investments Consultant

To improve your current financial situation, it’s crucial to make significant financial decisions so that you have enough disposable income to cover your living expenses. To effectively manage your personal finances and reach your financial objectives you need to establish a comprehensive financial plan and a budget.

Consider adopting the 50:30:20 budgeting rule, where 50 per cent of your monthly income is allocated to needs, 30 per cent to wants, and 20 per cent to savings and investments. Needs are essential for survival, while wants are desires.

Saving involves setting money aside, and investment is using accumulated savings productively. Track every expense for a month to pinpoint where your funds are being allocated and to identify potential areas for reducing expenses.

Given current high fuel prices and car repair costs, consider using public means of transport to save on car fuel and maintenance expenses.

Cut discretionary spending to free up more money for savings and debt repayment. Work towards allocating extra funds towards loan repayment to expedite Sacco loan repayment. An outstanding loan of Sh650,000 at a 12 per cent annual interest rate with a Sh29,000 monthly instalment will be cleared in 25 months.

Develop a two-year plan to restructure your financial situation and clear the outstanding loan. Prioritise setting up an emergency fund that can take care of at least six months of your expenses. You can start by allocating a portion of your income each month to create a financial safety net that can cushion you in case of unexpected expenses and emergencies.

Invest at least 70 per cent of the emergency fund in a money market fund. While your child’s education is important, choose a school within your budget. Seek additional income sources like side hustles to supplement your current earnings. Invest in skill development for career enhancement and potential salary increases.

As per the cost survey conducted by Integrum Construction Project Managers from September 2022 to February 2023, the average cost to construct one square meter (sqm) of a standard bungalow in the Nairobi and Mt Kenya region is Sh41,600.

Therefore, building a 100 sqm three-bedroom standard bungalow would amount to an estimated cost of approximately Sh4 million. Considering your current income, it’s not practical to fully finance the construction of the house through debt, as financial guidelines recommend allocating at least one-third of your net income towards loan repayments. 

Given your existing salary, you can allocate up to Sh40,000 for loan repayments. This amount will only afford you a Sacco development loan of Sh1,800,000 at an annual interest rate of 12 per cent, calculated on a reducing balance basis, and payable over five years. If your upcountry plots are not generating income, and you have no immediate plans for their economic use, consider selling them. The proceeds can then be directed towards home construction.

To realise your dream of homeownership, you can adopt the Incremental Housing Concept. Start by constructing a basic structure that can be easily expanded or modified in the future as your financial situation improves.

This approach will allow for a gradual and sustainable progression towards your goal of owning a house. Consider increasing your Sacco savings monthly contributions and always capitalise your Sacco dividends to deposits with the aim of bolstering your borrowing capacity and enhancing dividend earnings in subsequent years. 

Incorporating retirement savings into your financial objectives is crucial, as it ensures a comfortable life post-retirement, and it also provides tax advantages. You’ll require 70-80 per cent of your income before retirement to maintain a comfortable lifestyle afterward. Consulting a financial advisor can offer valuable insights customised to your individual circumstances.

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