My name is Michael. I am a Kenyan civil servant earning a salary of Sh. 107,000. After statutory deductions such as PAYE and others, my take home is Sh. 88,000.

However, I am in heavy debts, both small term and long term that take as much as Sh. 82,000 out of this Sh. 88,000 take home, and, so I remain with roughly Sh. 6,000 which is not enough to pay rent, feed my family and do other things.

I have a side hustle where 80 percent of daily returns goes towards paying a debt I took against its name. All these long term debts should end in 3 years time.

How do I navigate the small debts that have gotten me into this vicious circle of borrowing and topping up to meet my needs? I feel drained and stuck.

Expert’s Take:

From your financial report, your net salary is Sh. 88,000 but debts consume a colossal sum of  Sh. 82,000 (93 percent of your net) leaving you with a beggarly sum of Sh. 6,000 that is hardly enough to meet the basic expenses.

You seem not to know how much you exactly spend for necessary expenses like family upkeep, personal self-care, transport etc. You are  notably heavily indebted  but you have not provided the exact amount of the loans you have taken and how much you are paying for the short-term loan or the one you took for the side hustle.

To deal with the trap of debt that is almost strangling you, you need to develop a culture of financial discipline, come up with a tangible financial plan anchored on SMARTER goals, review your financial position, operate with a spending plan, track your money and transition from being a serial debtor to a good saver and investor.

Firstly, review your financial position and beliefs about money. Critically examine your financial conditioning or programming about money based on your childhood upbringing, beliefs and experiences with money as you grew up. This could inform the genesis of what you believe, think and do with money.

By reviewing your financial position, you will establish your net worth in terms of the sum total of you’re assets minus liabilities. If the liabilities outweigh the assets, it implies you are speeding down the road to poverty – which currently  appears to be the case.

A positive net worth would indicate you have the total assets (fixed and current) outweigh the liabilities and you can survive for a considerable period of time in case of job loss, incapacitation or any unforeseen eventualities.

Once you audit your financial lifestyle, you will know your true financial position, establish the triggers for the short-term and long-term debts, whether you are investing in appreciating assets or not.

The fact that you are heavily indebted suggests that you have a scarcity money mindset and you are perhaps being influenced by internal and external money influences such as the greed or desire to get rich quickly, and your friends or colleagues.

Secondly, track your money and work with a spending plan. From your report, it is discernible that you do not know how much you exactly spend on necessary and unnecessary expenses. As such, a lot of money could be going to waste without your knowledge.

Learn to monitor and record you expenses on a day-to-day basis then do a weekly and monthly summary of the total expenditures per every expense item or vote-head.

Once you do this for three months, you will determine how much every expense item like transport, personal upkeep, family consumption, transport etc. consume every month.

Note, the Sh. 6,000 you are left with is not sufficient for these items, and hence you need to identify every source of your money (big or small) and every expense (big or small) at your household.

This will help you draw a realistic budget as your spending guide. Apply the 50/30/20 budgeting guide to allocate your money to various expense items.

Were it not for your loans that take at least 93 percent of your net salary, 50 percent (Sh. 44,000) would go to necessary expenses (like transport, rent, family and personal upkeep), 30 percent (Sh. 26,400) channeled to various saving and investing vehicles (emergency, Sacco and insurance), and 20 percent (Sh. 17,600) set aside for wants like black tax, entertainment etc. You can consider adopting this planning at the end of your loans.

Thirdly, have a clear debt repayment plan. Start with repaying smaller debts then proceed to bigger ones. Alternatively, you can consolidate the debts you owe and approach your bank or Sacco to buy them off and give you one loan payable at an affordable rate with a given time frame.

Also, you may want to apply the debt avalanche method, wherein you make minimum payments on all debts and allocate any remaining funds towards settling the debt with the highest interest rate.

Since you have a family, you might want to consider getting assistance from your spouse, especially if she is working or if she is employable and has potential to earn income.

That way, she could take off some of your expenses and provide you with a small breathing space through which you can speed off payment of the costliest debt to free some of the money currently committed to debt repayment.

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In future, before you take a loan, assess your plan to repay it, the security required, the total cost of the loan (the principal and total interest payable) and consider whether the investment project will assist in repaying part of the loan (if not that’s a liability that requires financing from your salary).

In sum, graduate from being a serial debtor and become a frugal spender, saver and investor. Develop a saving and investing strategy.

Once you clear your debts, particularly short-term ones, start channeling at least 10 percent to a compound interest earning money market fund or reputable Sacco.

Once you clear the long-term loans in three years, increase the amount you save to 30 percent and spread it across various saving and investing vehicles such as money market fund for emergency (10 percent), Sacco (10 percent) and take insurance policies for your children’s education (10 percent). Have an investment business account for your business savings to run it.

Do not mix business money with other monies nor withdraw money from business anyhow. Pay yourself a salary equivalent to the size of the business. Do not borrow more money to finance your business without doing risk assessment or impact analysis.

This financial question was answered by Chacha Nyaigoti Bichang’ais a financial coach at Chachanomics Consulting Firm. He is also the author of Mastering Your Money.

A version of this profile feature was also published in the Saturday Magazine. The Saturday Magazine is a publication of the Nation Media Group.