| In this article, we use a case study to illustrate some of the common dilemmas faced by people facing sudden job loss. This is a fictitious story and any resemblance to a real life situation is purely coincidental. Jared and Mercy are thirty-eight and thirty five-years old respectively who have enjoyed their careers in the hospitality and IT industries respectively. They met and married while working for the same employer and soon after Mercy found a job with an IT company. They have two sons Alex and Mark who are nine and five years old respectively. Alex is in grade three while Mark will be in grade one next year. They live in a middle class neighbour-hood and enjoy a good lifestyle that include family holidays and eating out frequently. Due to the effects of the COVID pandemic, Jared’s employer has had to cut some jobs and everyone in Jared’s department has lost their job. They took out a mortgage near Jared’s work place, three and a half years ago and now, they are concerned about their ability to repay it on one income. Jared is sure he needs to seek another job but is also considering switching careers since he has acquired transferable management skills. They came to me for advice on what would be the best way to manage their financial resources going forward. |
From our conversations, I was able to establish the following:
- Their combined monthly gross income has been Kshs. 360,000 with Jared’s contribution being Kshs. 200,000.
- The mortgage balance is Kshs. 6.5M with a monthly repayment of Kshs. 59,000 at a subsidized rate of 8% p.a. negotiated through Jared’s employer.
- Mercy took a Sacco loan in 2018 to cover part of the upfront mortgage expenses. The current loan balance is Kshs. 200,000 with a remaining repayment period of 18 months. Her Sacco shares are currently Kshs. 320,000
- They have similar cars, which they bought in the same year. Each has an estimated resale value of Kshs. 400,000. They have just paid Kshs. 100,000 annual premium for both car’s comprehensive auto insurance.
- They have a piece of land currently valued at Kshs. 0.75M which they intend to sell when then prices increase to over Kshs. 1M
- They have an emergency fund of Kshs. 120,000 saved in a money market account
- Their living expenses excluding school fees are Kshs. 50,000
- School fees for Alex is Kshs. 25,000 per term, including transport and Kshs. 20,000 per term for Mark. These amounts will increase by 10% next year.
- Jared has taken out an education policy, which currently has a surrender value of Kshs. 300,000, and he pays a monthly premium of Kshs. 10,900.
- Both Jared and Mercy are saving towards their retirement in a Pension scheme and their Pension balance as at 31st December 2019 are Kshs. 3.5M and Kshs. 2.9M respectively.
Jared expects a total after tax redundancy package of no less than Kshs. 1.8M with extension of existing insurance covers i.e. life, accident and medical covers for a period of 9 months. The negotiated interest rate will remain in place for another 12 months and then revert to commercial rate at 14%p.a pushing the monthly repayment to Kshs. 85,895.
Their current dilemma is:
- Should they continue paying tithe in all their incomes in this tough economic situation
- Should they do away with the mortgage and rent a house?
- What would be the best allocation of the finances they receive?
I encouraged Jared and Mercy not to panic or succumb to self-induced pressure to make quick decisions. Instead, they should pray to God for wisdom and guidance and believe that they will come out of this experience whole and wiser. I commended them for working together as a couple.
In preparation for the meeting, I asked them to compile the following information:
- Gather all the facts from the right sources paying attention to benefits they might not be aware of
- Employer – Confirm last day of working, leave days, mortgage terms, benefits extension, retirement benefits statement
- Insurances – Confirm if your mortgage protection cover has a redundancy rider, life insurance surrender values, costs of medical insurance after 9 months
- Lender – Request for a loan current statements
- Investment Manager – Obtain current balances
- List down all their assets and liabilities
- Analyze their household budget and set a new budget for this season
- Estimate how long Jared might take to get another job or to generate an income from another source
To Jared’s relief, he learnt that he had a redundancy rider that would cover his mortgage repayments for a maximum period of 6 months. By analyzing their insurance covers, they realized that they do not need additional inpatient cover but may need more outpatient funds.
They had three main concerns, which I sought to address.
Should we continue paying tithe in this tough economic situation?
I sought to understand their challenge with giving and challenged them to think how keeping the tithe would help their overall situation while knowing that they are acting in disobedience to God. I urged them to put their trust in God who owns everything instead of putting their trust in their resources.
Analysis of their financial position
Please note, in this case:
- Life insurance cash value is accessible immediately by terminating the insurance policy.
- Upon leaving employment, Jared can access 75% of his Pension savings. This amount would be subjected to tax hence it would be less than indicated below. Tax calculation would depend on a number of factors indicated below. Tax calculation would depend on a number of factors.
Should they do away with the mortgage and rent a house?
It is obvious that they do not have adequate resources to pay off the mortgage and they cannot afford repayment at commercial rate on one income. However since they have a redundancy rider on their mortgage protection cover, that will cover the first six repayments, they can afford repayments for another 6 months; they do not have to make an immediate decision. They decided that if their net income increases by at least Kshs. 100,000 in six to nine months, they would retain the house else they would put it up for sale.
What would be the best allocation of the finances they receive?
Since they do not have to make mortgage repayments for six months, it necessary to do three separate budgets; the first six months without mortgage repayments, the next six months with mortgage repayments at 8%, and a monthly budget after 12 months with mortgage repayment at 14.5%
Recommendations:
- Continue paying tithe on income
- Maintain the life insurance to provide for children’s education
- Not access Jared’s retirement benefits but keep them invested in an Individual plan in a guaranteed fund to protect the capital
- Set up an emergency fund to cover 12 months’ worth of living expenses that can only be accessed in event of an emergency such as if Mercy losses her job. Keep the funds invested in the Money Market account – Kshs. 600,000
- Pay 12 month’s life insurance premium in advance – Kshs. 130,800
- Set aside funds to cover irregular expenses for the next 12 months such as school fees, car insurances, car service, outpatient medical expenses totaling Kshs. 473,500 Keep these in a separate money market account to be accessed when needed.
- Set aside 6 months’ worth of mortgage repayments Kshs. 354,000 in a money market account and pay the lump sum after 6 months. These funds remain invested in a money market account for the duration.
- Keep the balance of funds invested in a money market account as Jared looks for a new job or decides to start a business.
These recommendations are offered with the intention of:
- Give Jared and Mercy peace of mind to know that they can take care of their financial obligations for the next twelve months. This frees Jared to explore job or business opportunities without settling for less.
- Should they need to sell the house, they will not do it under duress they will be patient to secure a good offer.
- Assuming an 8% p.a. money market return, they will have an after tax investment income of at least Kshs.8,500 per month for the first 6 months which they can opt to either reinvest or access it monthly to cater for Jared’s personal expenses.
To achieve this outcome would require discipline from both Jared and Mercy to implement the plan, trusting God to provide for all their needs and remaining flexible to His direction and making well thought out changes when needed.
In our next articles, we will explore what to do if Jared:
- Gets a job in 9 months
- Does not get an income in 9 months
- How he would have prepared better for this scenario
Caution: This is a hypothetical case designed to give a general overview of personal finance strategies. It is not intended to be definitive or take the place of a financial advisor. The strategies outlined may not be suitable for every individual.