Please help! I earn Sh225,000 gross and have Sh4.75 million in loans

My name is Johnstone. I’m 43 and a civil servant working in Nairobi. I earn a gross pay of Sh225,000. I have become a slave of bank loans. I tried some businesses but they failed.

I live in my own house worth Sh7.5 million inclusive of the plot. I have another plot worth Sh3.5 million within Nairobi metropolis which I want to dispose to settle my loans.

I also have another land worth Sh1.7 million where I do farming (maize & beans).

My loans are as follows:

1. Bank loan balance: Sh. 3.7 million, paying Sh96,000 per month.
2. Sacco loan balance: Sh. 700,000, paying Sh34,000 per month.
3. Sacco loan balance: Sh. 350,000, paying Sh9,000 per month.

My budget is as follows: Sacco saving Sh5,000 per month (saved Sh700,000), education insurance Sh5000 per month, Nssf Sh1,000 per month. Expenditure rent zero, traveling/fuel Sh15,000, house shopping Sh15,000, electricity Sh2,500, airtime/data Sh3,000, TV subscription Sh1,200. Entertainment Sh5,000, others /miscellaneous/parents/siblings support Sh7,000. Children school fees Sh240,000 per year.

I don't have emergency savings. My account is zero.

How can I get out of this situation?

Chacha Nyaigoti Bichang’a says

You need to formulate a versatile five-point financial management plan anchored on the following strategies:

1. Review your financial position and expenditure

Your checkoff deductions, (including PAYE, NHIF) totals Sh185,200, leaving you with a net pay of Sh39,800.

Your expenditure totals to Sh48,700 excluding a colossal sum of Sh120,000 spent on school fees which translates to a total of Sh168,000. This means that you are living far beyond your means.

You are definitely relying on borrowing/loans to pay fees because your net pay cannot sustain it.

Do you know where your every shilling goes per day, week and month? You are saving a meager Sh5,000 in a Sacco which translates to 2 percent of your gross pay instead of the bare minimum of 10 percent.

Your education insurance is also a measly percentage of 2 percent. You need to have in place some austerity measures that can help you reduce your expenditure as follows:

a) Reduce traveling expense from Sh15,000 (37 percent of your net) to around Sh8,000 and save Sh7,000. You may decide to travel sometimes by matatu.

b) House shopping expenses: Cut from Sh15,000 to around Sh10,000 (25 percent of net) by doing bulk shopping of foodstuffs. You will be left with Sh5,000 disposable income. 

c) Entertainment: Cut from Sh5,000 to around Sh2,000 

d). Miscellaneous expenses: Reduce this unnecessary expense from Sh7,000 to around Sh4,000. 

In total, you will be able to get Sh18,000. Make this amount your emergency fund and put it in a money market fund earning a modest compound interest of 8 to 12 percent. 

2. It will take three and half years to clear your bank loan

It will take you three years and 10 months to clear your Sacco loan. This implies that unless you diversify your sources of income you will not save much.

Remember, it is difficult to dispose a fixed asset such as land. Therefore, to sell your plot worth Sh3.5 million in Nairobi may take longer than expected. If you become so desperate, you may dispose your plot at a much lower price than its real market value.

Do not sell the land which you use for farming as this provides your most realistic source of additional income. 

If you don’t want to run the full loans repayment period, you may, in the interim, use the money obtained from reduction of expenses (Sh18,000) to increase the monthly repayment.

You could also consider putting the Sh3.5 million plot on sale with a sell-by date of about three months. 

Proceeds may be enough to defray the remaining loan balance. Once that is done, readjust your financial outlay by establishing an emergency fund equivalent to 3-6 months' average monthly expenditure, increasing Sacco savings to about 20 percent of the gross, and increasing insurance premiums to about 20 percent of salary.

3. Increase your investments in your children's education

It is advisable that you take an education policy for every child you have. As your finances improve, you need to raise your education policy from Sh5,000 to Sh20,000.

- Mr Bichang'a is a financial coach at Chachanomics Consulting Firm and the author of Mastering Your Money

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Benjamin Cheruiyot says

You have concentrated your investments in real estate and farming. A term life endowment policy and cash savings of Sh700,000 only means you’re quite conservative in investments.

You can do more by increasing investments in the capital markets to provide you with the much-needed liquidity, especially after retirement.

Your loan balances amount to Sh4.75 million, against an asset portfolio of Sh12.4 million. Your assets should sweat harder to return at least 10 percent from passive investments.

Your net worth (assets minus liabilities) is Sh8.65 million. With your annual expenses (excluding loan repayments) amounting to Sh956,400, you will need Sh10 million net worth to cover your lifestyle without working a salaried job ever again.

Your investments would earn Sh1 million at a modest return of 10 percent annually. You need to do an appraisal of your farming activities to determine if they are financially viable to top up your loan repayments.

Do a lifestyle audit to eliminate excesses in fuel and transport, and find the Sh6,300 that you can’t account for. Loans occupy 61.7 percent of your income. The sooner you settle them, the better for your long-term finances.

With current loan repayments amounting to Sh139,000 for Sh4.75 million loan balances, selling the vacant plot will leave a balance of Sh1.25 million that can be serviced with Sh44,000 monthly repayment for three years. You have only savings of Sh700,000 locked in Sacco and can’t afford to take a fresh loan to repay the old loans.

That would leave Sh95,000 available for investments. Investing this amount in a money market fund will accumulate to over Sh1.2 million in a year (at 9 percent annually).

You can withdraw Sh1 million and invest in a government infrastructure bond earning at least Sh130,000 annually. You will receive Sh65,000 every six months. Repeating this process will result in Sh1 million invested every year. In four years, your investments will total Sh4 million and cumulative payouts of Sh520,000.

Other investments that would not drain your time and energy include boosting your SACCO monthly deposits to Sh20,000.

In another year, your savings will accumulate to Sh940,000 that will earn you at least Sh90,000 at 10 percent annual interest. In four years, your cumulative earnings will approach the Sh500,000 mark. These investments will provide you with greater liquidity to finance other long-term projects.

- Mr Cheruiyot is the Engagement Lead at Abojani Investments, a personal finance and investments advisory firm

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