I am married and earn Sh56,000 net. My expenses are: Sh13,500 food and groceries, Sh2,000 airtime, Sh4,800 transport, Sh3,000 Sacco shares, Sh4,000 wife’s allowance, Sh5,000 rent for my small sister who is in college, Sh15,000 rent for my house. We have a two-year-old and my wife – who is unemployed – has been taking care of him.
I am thinking of taking a loan of Sh1 million from micro-credit lenders to buy a small car that my wife can use to work as an Uber driver or start a small business for her. If my spouse starts working, I might have to hire a nanny and that will cost an extra Sh7,000 to Sh10,000 on my payslip, which might leave me with nothing. What should I do?
Chacha Nyaigoti Bichang’a, a financial coach at Chachanomics Consulting Firm and the author of Mastering Your Money
Your total expenditure is Sh47,300, but Sh8,700 is unaccounted for. You do not seem to have a budget, and you don’t track your money.
Start monitoring your expenses by recording every expense incurred daily, then do a weekly and monthly summation. By doing so, you will be able to draw a realistic budget unique to your needs and wants.
Second, align your budget with your short-term, medium-term and long-term financial goals. Cut down on certain expenses like rent, food and groceries.
You are spending Sh15,000 on rent (27 per cent) which is far much more than the recommended average of 15 per cent (translating to around Sh8,500).
You will save Sh6,500 if you move to a cheaper rental unit that is not far from your workplace. You can reduce your expenditure on food and groceries from Sh13,500 (24 per cent) to Sh11,200 (20 per cent) and save Sh2,300. In total, you will save Sh8,800 which can be channelled to a viable saving plan.
Use the 50/30/20 guideline. 50 per cent (Sh28,000) of your income should be for necessary expenses such as rent, household shopping, transport, rent for your sister, transport, airtime and wife’s allowance).
30 per cent (Sh16,800) should be spent on saving vehicles like Sacco, and money market fund (MMF). You are currently saving Sh3,000 (five per cent) in Sacco shares which is much below the minimum recommendation of 10 per cent.
Channel 20 per cent (11,200) to wants (family clothing, entertainment and black tax). Under this expense item, you need to contribute about Sh1,200 to social welfare groups, a token of Sh1,600 to parents alive and Sh5,000 for family or personal entertainment.
Employing a nanny will be an extra burden. Let your wife continue taking care of your child as you decide on the kind of business you can establish for her.
The temptation to go for a microcredit lender is because you do not have a robust saving scheme. Getting a loan from a Shylock will cost you an unbearably higher interest rate than what a Sacco or Chama would advance you.
The terms and conditions of such a loan can have very lethal consequences that could end up costing you your business plus installments in the event of a default.
Also, you need to understand that the terms of loans at some of these micro-lenders are such that a huge portion of the loan could end up being taken out as processing fees.
Remember, people’s spending habits are greatly influenced by emotional desires about things they value. Learn to build your capital reserves gradually.
Exercise self-control and delayed gratification to realise the benefits of saving. You should not be in a rush to go for a loan from Shylock. Take control of your internal desires or external influences and avoid such an expensive credit facility.
Suppose you channel 30 per cent (Sh16,800) to a saving scheme. Sh10,000 should be channelled to a deposit-taking Sacco and in three years you will realise Sh360,000 and gross total dividends of Sh72,000 at a rate of 10 per cent per year (exclusive of withholding tax).
Sh6,800 should be saved in a reputable money market fund earning a compound interest rate of 13 per cent which translates to a gross sum of Sh297,579 in three years. Instead of borrowing from a Shylock, you can borrow about Sh1 million from Sacco after saving for three years.
Before starting an Uber business for your wife, ask yourself, how competent is she for the business? What are the potential risks of the business? Will the business compromise family togetherness and core values like integrity? Which other businesses can she carry out with flexibility, less capital, and emotional strain?
Scan the business environment or do a feasibility study on potential vehicles for earning passive income besides the business.
Consider investing in real estate and/or government securities, particularly taking out a loan to invest in lucrative infrastructure bonds.
Such bonds have numerous benefits like tax exemption, regular income at stipulated intervals and saves you the hassle of worrying about the security of your money.
In the meantime, your wife can explore employment opportunities. Employment is often a critical learning phase towards entrepreneurship. To improve her employability, she can take a few skills-oriented short-term, certifiable courses online as per her qualifications.
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.
