PERSONAL FINANCE: Living Below Your Means

We exist in fast paced spaces characterized by endless needs of an urban lifestyle, social class pressure and social media success. Many Kenyans in the income category are unable to pay off their debts in time as evidenced in the high record of non-performing loans reported in the banking sector for the reporting period ending December 2022. KCB bank for instance recorded growth of non-performing loan book from 16bn in 2020 to 118bn Kenya Shillings in 2022. This trend is replicated in other commercial banks and is explained by distress in economy that has led to increase in the cost of living without a proportionate increment in average household income.?

When the cost of living increases, households are supposed to either find means of proportionately increasing their income or cut down expenditure. Cutting down household expenditure is not an option that many bread-winners will opt for because of the need to maintain social status. We therefore witness less of movement from high-cost houses, expensive academies for kids and costly entertainment subscription. To sustain status-quo households go for loans and credit purchases with the hope of repayment when they earn. Repayment becomes difficult as new needs continue to arise and more debt continues to accumulate leading to inability to repay.

Before President William Ruto’s directive to advance waivers to negatively listed Kenyans on the Credit Rating Bureau (CRB), 4.6 million Kenyans had been negatively listed against a total of 15 million listings (source: Central Bank of Kenya CRB listing Report 2022). This is an indicator that 30% of Kenyans are living above their means and cannot afford further borrowing to better their lives.?To further establish the reality of debt burden on Kenyan households, I asked 10 Nairobians employed with different organizations whether after pay-day they maintained zero debt liability. Three had no debt after earning salary, two had no debt with their friends and family members but had loans with formal lending institutions and the remaining five did not earn enough to pay their formal and informal lenders.

Personal financial discipline begins with establishing your least possible income in a bad month and budgeting with that income. Windfall incomes like commissions, revenue from side-gigs and dividends expected from financial assets should not be budgeted for as part of regular income. You need to spend on priorities first and develop a habit of paying-off outstanding debts rather than accumulating them. Living below your means may also require that you develop assertive skills to help navigate social pressure and classism.

What else should households do to live below their means?