If you are even just a mild observer of how events have unfolded over the recent months you might have started being just a bit concerned. To buy the same household and food items in the same supermarket, you are spending 20% – 30% more. As I write this article the dollar has crossed the Kes 100 mark and transporting yourself from A to B has become a conscious cost let alone driving a car. People always ask me how they should be expected to manage money, save, invest etc when costs are rising.What I cannot do is give you a magic formula to this. Living expenses are on the rise is a fact. When costs are rising, the only thing you can do is cut expenses, no matter how basic you feel they may be or find a way to increase your income. Notice I use the word YOU and not your employer, sister brother, parents etc because YOU need to take responsibility. It is a lot easier to blame someone for this or expect someone else to sort it out. Even your employer is facing challenges keeping the business afloat so do not expect a miraculous increase in salary unless you have consciously been doing something to deserve it.
What continues to baffle me though is the fact that one of the first things that many people seem to adopt to handle this increased cost is debt. Now in this article I am not referring to Good Debt that you may use for investment purposes. Debt where you actually make more than the cost of interest from the return on the asset. I am talking about Consumer Debt. I get many emails especially now of people asking if they should take a loan to cater for their increased costs. I can imagine the response that those who walk into a bank and ask a commission driven sales person get. After all the sales person is being affected by the same costs and needs this commission to pay bills. They might just lead you in the direction of an unsecured personal loan. The type of loan taken to sustain your lifestyle is what I am calling a bottomless pit. People are attracted to the upfront lump sum and often convince themselves that by the time the monthly payments come round they will have figured something out. I have done debt counselling with people who take the lump sum and even put aside three months worth of payments from the loan itself, again hoping against all odds that something will have worked itself out in that time. This mysterious “working out” with absolutely no plan rarely “works” and on top of high living expenses, there is now a monthly repayment to contend with. Debt to sustain lifestyle on any level is a bottom less pit because it ends up increasing your expenses, and thereafter the urge to keep borrowing whether it is through your bank, your sacco, the microfinance company, the loan shark or taking a salary advance.
One of the fastest ways to increase the level of money in our pockets and hence the ability to cope with rising expense is by reducing the amount of debt that we currently hold. We may have accumulated this debt in the past due to the tendency to spend more, as a result of necessity or continue to add on debt consequential of our adopted lifestyles. Debt reduces our available income in the short term usually because we have to service it on a monthly basis, be it credit card, consumer loan or mortgage. In the long term we pay a lot more money in interest as compared amount of principle debt itself. Let’s take for example bank loans at an interest cost of 15% per annum. If you borrow Kes 1 mn for 5 years you will have paid back Kes 427,000 in interest alone. If you had invested those same monthly interest repayments at current Treasury Bill rates you would have accumulated Kes 980,000. If this loan was for 10 years you will have paid just over Kes 1 mn in interest. If you had done the same investment, you would have about Kes 2.5 mn. The opportunity cost in terms of investments you could have made with this interest is massive. These are savings that put you in a better position to handle inflation.
The debt cycle, especially now, needs to be broken. Start by living within your means (spend less than you earn) even though it may necessitate hard decisions. Secondly, if you can, pay out more than the required minimum amount per month on debt. You will reduce the amount of interest paid and the period of the loan therefore releasing some income back into your budget. Tough times call for innovative measures so do not make them tougher by sinking into the bottom less pit called lifestyle debt.
Waceke Nduati –Omanga| waceke@centonomy.com| Twitter @centonomy.