Help! I am drowning in debt. I earn Sh87,000 but take home Sh11,000!

My name is Donovan. I am stuck financially due to loans and debts. My gross pay is Sh87,000 which translates to a net of about Sh60,000.

In 2020, I took a loan of about Sh1.5 million from the bank and made a deposit of Sh1.2 million to a company to buy 14-seater matatu which cost Sh2.4 million. We agreed that I would pay the balance of Sh1.2 million in monthly instalments of Sh60,000. Due to the 2020 Covid pandemic though, my business was unable to pay the instalments. I went back to the bank for a top up, and this further put pressure on my salary. Today, I am earning Sh11,000 per month.

My business is not doing well and my matatu was taken away by the company. I have family and kids. I am unable to borrow money and I am completely stuck financially. All my savings are finished. Please advise me on what to do to get out of this situation.

Dominic Karanja, a financial planning and investments consultant.

It's unfortunate that you are going through financial difficulties because of debts that have mainly emanated from failed investments, however your idea of seeking assistance is timely. Despite the challenging situation there are steps that you can take to ensure financial stability.

You need to start by first assessing your current financial situation. Create a detailed budget to understand your income, expenses, and debts.

List all your debts including the ones owed to the banks, debt owed to the motor vehicle financing company and any other debt you might not have highlighted.

Determine your monthly income from all your income sources. To stabilize your finances, you must consider boosting your income by taking side hustles to complement your current income.

List all your monthly living expenses and try to prioritize your expenses. Focus on spending on essentials like food, rent, utilities, and school fees and consider moving to a more affordable location.

Reduce spending on luxuries or non-essential services like entertainment. You also need to take stock of the assets that you own that can be leveraged to ease your financial burden.

Consider selling items you no longer need to generate quick cash. If you own land that isn’t critical to your livelihood, selling or leasing it could provide significant relief.

Under the "one-third (1/3) rule" after all deductions, you should retain at least one-third of your salary. In your current situation, this implies a minimum take-home pay of Sh29,000. 

It is recommended that you commit at least a third of your net pay towards loan repayment but in your case, you have committed 82 percent of your net pay towards payment of your loan.

You need to engage your creditors to explain your financial situation. They may be willing to offer a moratorium period or restructure your loans to fit your current financial situation. 

You can use the debt avalanche method where you make minimum payment on each debt, then take any leftover available money to pay off the debt with the highest interest rates.

Focus on paying off high-priority debts first, such as the ones bearing the highest interest rates or those that might result in the severest consequences if not paid on time.

Engage the bank to restructure your loan with the aim of reducing the monthly instalment through either extending the repayment term or temporarily pausing payments through a moratorium.

Consider negotiating a debt management plan with the bank where they can consolidate your debts into one with manageable monthly instalments.

If the matatu financing company is still demanding payment after repossessing the vehicle, you can negotiate with them for a fair settlement or waiver of the remaining balance.

Financial difficulties affect the entire family, and their understanding and support is crucial at this moment. Have a candid discussion with your family members about your current financial situation and involve them in cost-cutting measures. 

For instance, if your spouse is working and earning some income, you may sit down and see how this income can lessen the burden you currently bear.

There is no shame in seeking help, particularly from your partner. Also consider reaching out to immediate family members and friends for temporary support or small loans.

Once you stabilize your current financial situation, you should focus on building a future financial foundation. You need to create an emergency fund by saving a small amount to have a safety net that can cater for six months of your living expenses in case of a mishap.

Consider joining a SACCO because it will offer you an avenue where you can save and borrow at a reasonable interest rate. It's important that you consult a financial advisor to help you create a personalized recovery plan.

It is said that in life, you should aim to either earn or learn. Take the lessons from your current predicament, particularly on starting and running new ventures, funding new businesses, taking risk assessments, and knowing when to jump before the whole ship takes you down with it. 

Financial recovery is a gradual process that requires discipline and willpower. Focus on small milestones, such as clearing one debt or finding a new income stream.

Learn from past experiences to avoid repeating mistakes, such as overborrowing or investing without adequate research. Draw inspiration from stories of other people who have struggled to overcome the same situations.

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.