Minimal wage earners also ought to budget

NAIROBI: Michael Kang’ethe, a self-employed butcher, recalls the time he worked with an insurance company selling their policies. His pay was pegged on commission on sales and it was hard to subsist on the little wages till the next pay day. Futher, his pay was inconsistent each month meaning he had to make financial sense balancing his budget from the pitiful income.

“I lived frugally but wisely, using the little that I had. There was this urge to spend it as it came believing the next pay day would be good but each month told a different story,” he says.

Michael’s income was always fluctuating and this made him envy those with fixed salaries who seemed to have freedom in spending their finances the way they wanted. He believed his financial freedom would come when he would make more money and had something left as disposable income.

As he was to find out later, this notion was entirely wrong. The more he made, the more he would spend on wants. He had to borrow more to sustain a lifestyle he had no need of and he quickly found himself on a path to financial ruin before reality-check set in.

Financial experts warn those with variable or fluctuating incomes are prone to debt traps. They tend to borrow during seasons of low incomes but will quickly spend their earnings during high income seasons without considering repaying their debts at first. This conspires to keep them, as well as the salaried lot, in debt traps.

Those with fluctuating incomes need to live within realistic budgets like salaried persons. Gilbert Wanderi, a personal finance expert, says they should factor priorities over non-priorities in budgeting.

“If they are prudent with the little they have, they will be surprised by how much they can accomplish with so little. But, it calls for discipline and perseverance in being accountable for every shilling spent. As with any business, you cannot sustain a household if the outflow exceeds income,” he says.

Because many deem their wages as insufficient, they have adopted this habit of living on borrowed money instead of making a difference with what they have. They will take things on credit from shops and repay slowly over an extended time period. Accumulating debts mean they cannot pay or the shopkeepers’ patience may wear thin and refuse to extend them credit services.

“Whether you are salaried or survive on wages does not matter. It is realistic to live within your financial bracket and avoid temptation of taking things on credit or loan to bridge deficits,” Wanderi says.

He further observes that variable income, no matter how little it is, can make an individual feel financially self-sufficient if wisely used. The only way to achieve this is by making a workable budget based on income and stick to it.

This planning will address the mysterious disappearances of one’s earnings which usually results in shortfalls in paying for essential services and bills. It will also nip in the bud that need to borrow, from time to time, as individuals in the lower income segment work their way up to financial freedom.

“With limited income, you cannot always be able to pay for everything you need but you can save over time and get these items without draining yourself financially,” he says.

Giving an example using a Sh7,000 income - Wanderi gives a budgeting breakdown as follows: Fifteen per cent should go to housing, thirty per cent to food, three per cent to clothes, twelve per cent to education, ten per cent to savings, ten per cent to medical, ten per cent to emergencies while the last ten per cent should cater for transport.

“Assuming the individual sticks to this, he will avoid holes in the pocket while planning,” he says.

The ‘holes in the pocket’ refers to spending money as it comes without budgeting. It does not consider priorities and non-priorities.