How do I budget a Sh70,000 salary to pay off Sh800,000 debt in 24 months

My name is James Thiong’o. I’m 34. I have accumulated debt that now amounts to Sh800,000. These debts are from members of my extended family and my friends. They are interest-free. I recently got a job in Nairobi with a net salary of Sh70,000. I am scheduled to start this job in a week’s time. I am afraid that if I don’t budget for this money, I might not be able to pay off my debts. How should I budget for this? What allocations should go to rent, food, transport, entertainment, savings, emergency, and loan repayment? I would like to pay this loan off in 24 months. Please help.

Benjamin Cheruiyot, the Engagement Lead at financial investments firm, Abojani Investments

Your wish to repay the Sh800,000 loan within two years will require you to set aside Sh33,000 monthly based on your salary of Sh70,000. This will leave you with Sh37,000.

In Nairobi, rent will be your biggest expense. Look for housing outside the city. However, this may cause your transport to rise. You can circumnavigate this by traveling to and from work during off-peak hours. In any given instance, rent is supposed to be 20-25 percent of your monthly income. This translates to not more than Sh17,000 in your case. If you spend this, you will be left with Sh20,000 which can be spent as follows:

Food: Sh8,000

Transport: Sh4,000

Entertainment: Sh2,000

Savings: Sh3,000

Emergency: Sh2,000

Water & Electricity: Sh1,000

I would suggest that since your loan is not accumulating interest as it is from family and friends, you stretch your repayments from 24 to 30 months. This will amount to repayments of Sh27,000 monthly, and save you Sh6,000. With this, you can increase savings to Sh5000 (preferably in a SACCO), emergency fund to Sh4000 (preferably in a money market fund account), and allocate Sh2000 (preferably in an ordinary bank account) for short term needs.

Your savings of Sh5,000 in the SACCO will amount to Sh60,000 annually. By the time you finish the loan repayment, you will have Sh150,000 and will have earned at least Sh12,000 interest on deposits, besides the 3X loan multiplier effect that would give you Sh450,000 funding for projects such as land. Savings of Sh4,000 in the money market fund will amount to Sh120,000 in 30 months. At an average interest rate of nine percent annually.

Also, you can find more affordable housing outside the city at lower rates of around Sh12,000. If you the money saved in your Sacco, you will have saved an extra Sh150,000. This will give you Sh300,000 in Sacco savings alone and Sh128,000 in money market fund savings. By the time you finish repaying your loan in 30 months, you will also have saved Sh452,000.  Once you are through with loan repayment, you should consider an individual pension plan and investments in stocks and government debt instruments. Diversifying your investments will be vital in safeguarding against market risks.

*******

Boniface Oyunge, a financial and investments analyst at Mwango Capital and an associate member with the Institute of Certified Investments & Financial Analysts.

You will need to consistently pay off Sh33,000 every month for you to offset your debt in exactly two years. You need to start by creating a budget.  To do this, you can use the 50/30/20 rule to split your net income between needs, wants, savings, and debt. The first 50 percent will include Needs. These are your everyday necessities such as rent, food, transport, electricity, and water bills. The allocation for these will be Sh35,000.

The second 30 percent will include Wants. These are your life’s desires but not necessities. They include entertainment, gym memberships, and dining out. The allocation for these will be Sh21,000. The remaining 20 percent or Sh14,000 is what should go towards savings and debt repayment. Normally this 20 percent allocation should also cover investments. However, with a debt pile of Sh800,000 and only Sh70,000 net income debt repayment supersedes investment.

Paying off your debt in 24 months may not be feasible at your current net income. You will need other sources of income to supplement your salary in order to create more cash for repayments. You can do this by starting hustles and consultancies around your area of expertise. 

However, you can stretch yourself to get some extra cash for the repayments. For example, you can suspend a large percentage of your 30 percent allocations to Wants and redirect this cash to debt repayments. This means that if you hive off Sh19,000 and combine it with the 20 percent allocation of savings and debt (Sh14,000), you will have met your monthly target repayment of Sh33,000. You will be left with Sh2,000 which you can use for entertainment. This should however be a temporary measure as Wants are also important for wholesome living. You can further readjust your lifestyle to create an emergency savings fund by trimming your primary ‘Needs’ budget. For example, out of the Sh35,000, you can allocate your basics as follows:

Rent: Sh13,000

Food: Sh10,000

Transport: Sh4,500

Water & Electricity: Sh1,500

Black Tax: Sh1,000

This will leave you with an extra Sh5,000 which you can use for your emergency savings. Put this in a money market fund earning about 8-9 percent pre-tax yield. For instance, an initial investment of Sh5,000 into a money market fund with monthly contributions of Sh5,000 would yield about Sh124,000 after 24 months (assuming constant interest rates over this period). You will have paid off your debt and built-in some savings.   BY DAILY NATION