The Adeyemi household: triage under a school-fees deadline
Tunde (41) and Bisi (39) Adeyemi have combined net monthly income of ₦850,000. Their essential outgoings are mortgage ₦180,000, food and utilities ₦210,000, transport ₦90,000, a personal loan ₦75,000, life insurance ₦20,000 and the 5% minimum on a ₦1.2m credit card at 36% APR (₦60,000). Discretionary spending averages ₦150,000, leaving ₦65,000 surplus. Their emergency fund is ₦50,000. The older child's annual school fee of ₦600,000 is due in three months; the school offers four quarterly instalments at no extra charge if arranged before the deadline. The credit card has no balance-transfer fee offer. Tunde's employer is restructuring and has announced possible redundancies in nine months. Bisi wants to start a one-year catering course costing ₦400,000 next month. They have no income protection and their mortgage has no payment-protection plan. Tunde asks whether they should use the surplus to clear the card, pay school fees or start the course.
1. Construct a 12-month cash-flow plan that addresses the school-fee deadline, the credit card and the redundancy risk. Show the monthly arithmetic and state what you would defer.
Read the worked answer
Baseline arithmetic
- Essential outgoings including minimum debt payments: ₦180,000 + ₦210,000 + ₦90,000 + ₦75,000 + ₦20,000 + ₦60,000 = ₦635,000.
- Add discretionary ₦150,000 = ₦785,000; surplus is therefore ₦850,000 − ₦785,000 = ₦65,000.
- Debt-service ratio = (₦180,000 + ₦75,000 + ₦60,000) ÷ ₦850,000 = 37%, already high before any new borrowing.
- Emergency fund covers ₦50,000 ÷ ₦635,000 = 0.08 months, effectively nil.
Priority order
- Secure the school place without new debt. Arrange four quarterly instalments of ₦150,000 before the deadline. Ring-fence ₦50,000 a month for three months from the surplus. This is achievable without touching the card because the surplus is ₦65,000.
- Defer the catering course. It is discretionary, costs ₦400,000 and adds no immediate income. Starting it next month would force the school fee onto the card at 36%, which is value-destroying.
- Build a small redundancy buffer. Cut discretionary spending by ₦75,000 (50%) and direct the freed cash plus ₦15,000 of surplus to a buffer: ₦90,000 a month. After the first school instalment is funded, redirect the ₦50,000 school-fee sinking amount to the buffer. By month nine the buffer could be approximately ₦700,000–₦800,000, not three months' costs but enough to avoid immediate card use.
- Do not prepay the card yet. At 36% APR the card is expensive, but the school deadline and redundancy risk create a liquidity-first case. Once the first instalment is secured and the buffer reaches one month's essentials, switch the surplus to the card and pay above the minimum.
- Keep the life premium paid. Cancelling it would create a protection gap at the worst time. Review the mortgage payment-protection quote separately; do not buy it by cancelling existing cover.
2. Bisi proposes consolidating the ₦1.2m card balance into the mortgage at 18% over 15 years. Evaluate the proposal, showing the key numbers and the risks.
Read the worked answer
Monthly cost comparison
- Mortgage consolidation: ₦1.2m at 18% nominal (1.5% monthly) over 180 months gives a payment of approximately ₦19,300 a month. Total payments are about ₦3.48m, so total interest is roughly ₦2.28m.
- Card at 36% APR (3% monthly) with the current ₦60,000 minimum would take about 31 months and cost roughly ₦0.65m in interest, assuming no new spending.
Judgement
The consolidation lowers the monthly cash requirement and the interest rate, but it raises total interest because the debt is spread over 15 years and converts unsecured borrowing into secured borrowing. If the Adeyemis miss payments, the lender can pursue the home. It also treats the symptom rather than the spending behaviour that created the balance.
Recommendation
Do not consolidate now. Keep the card unsecured and use the avalanche method: after the school-fee instalment and a one-month buffer are funded, direct surplus to the card. If they cannot control card spending, a consolidation may reduce the risk of default, but only with a closed card account, a written repayment plan and a check that the mortgage has no early-repayment penalty. The adviser should record why consolidation was rejected and review the decision if redundancy occurs.
3. Identify three monitoring measures and threshold triggers for review.
Read the worked answer
- Debt-service ratio. Current: 37%. Set a trigger at 40%; above that, no new credit and a mandatory budget review. If the personal loan ends, recalculate before assuming the cash is spare.
- Emergency-fund months. Current: 0.08 months. Target one month (₦635,000) within six months and three months within 18 months. Trigger a review if the buffer falls below two weeks' essentials.
- Credit-card balance and minimum-payment ratio. Target zero balance within 12 months and no new card spending. Trigger a review if the balance rises or if minimum payments exceed 8% of net income.
Additional check: school-fee sinking fund must equal the next instalment 30 days before the due date. If Tunde is made redundant, immediately switch to a survival budget, contact lenders before missed payments and check whether the mortgage payment-protection plan has a waiting period.