Are you in debt?

July 29, 2013 by ’Nimi Akinkugbe (nakinkugbe@punchng.com) 

   

’Nimi Akinkugbe
| credits: File copy

Are you facing money problems? The early warning signs are usually very clear and include the following:

•You are completely broke long before payday

•You are regularly having to borrow from friends and relations just to make ends meet

•You are missing debt payments

•You are coming under pressure from your bankers and other lenders

•Your money worries are keeping you awake at night

How did you get to this point? Is it your lifestyle? Are you extravagant? Do you make poor spending decisions? Do you feel under pressure to try to keep up socially? Perhaps you are just not earning enough to fund your current lifestyle and obligations. There are so many reasons for money problems, but the good news is that by recognizing and acknowledging the fact that there is indeed a problem, you can start to take the deliberate and necessary steps to address it.

Your attitude to your debt problems can hinder your financial recovery. If your way of dealing with it is to wish it away, remember that inaction will only make things worse. With interest, late payment penalty charges, and the attendant fees and charges you will find that almost all your money goes towards debt service. It is important to get your debt under control or at least to try to reduce it significantly.

It is important to know how much you owe if you are going to get out debt. Who do you owe? How much do you owe? What is the interest rate on your loan? To get a true picture of what you owe, list all your debts – in no particular order at first. You can list them according to amount, due dates, interest rates, your creditors; it doesn’t really matter.

Be sure that you are current with the minimum payments on all your debt. If you are finding this difficult approach your creditors to discuss the possibilities of restructuring the debt in a way that enables you to repay over an adjusted period and in amounts that you can more easily afford. Failure to make timely payments will only make things worse.

Track your expenses for a month to determine exactly what comes in and what you are spending it on. Create a budget and set strict spending limits for food, transport, clothing, school fees, entertainment, and utilities. There is usually some waste lurking in the monthly budget; be realistic and honest with yourself, as you must find a way to cut back. If you can find just that little bit of extra money after budgeting for the entire essential expenses, then you can use this towards reducing your debt.

Make every effort to stop the bleeding. Try not to incur any additional debt. You will have to live below your comfort level for a time and will certainly have to do without some luxuries, but it will be well worth it in the end.

Prioritise your debt and put your bills in the order in which you want to pay them off. Ideally it should be organised according to interest rates. The higher the rate, the more you are paying beyond your actual principal so it makes sense to pay off the debt with the highest interest first. On the other hand, some people prefer to pay off smallest debts first, as this is motivating and quickly gives a sense of achievement as they systematically pay off their debt. As you start to tackle your “priority” debts, determine how much extra you can afford to pay each month over and above the minimum monthly repayments.

Bear in mind that the most important debt isn’t necessarily the largest. These are the ones where serious action can be taken against you if you don’t pay what you owe such as rent or mortgage repayments, secured loans, and utility bills. If you don’t sort these out, you will be disconnected from utilities, or face eviction or the repossession of your home.

It is almost impossible to live totally debt-free; most people will have to borrow money at some stage in their lives. Borrowing can be a useful way to help spread out the cost of large purchases or expenses that you could perhaps not otherwise afford. It can also help you through difficult times or periods when there just isn’t enough cash. Borrowing to invest can make it possible to attain greater levels of financial success than if one depends solely on ones own resources.

Debt often has negative connotations, yet one must differentiate between “good” and “bad” debt. “Good debt” is debt that creates value and can help to build wealth and generate income. This includes borrowing to buy property, to finance an education, a business or for investment purposes.  “Bad debt” is where you borrow to finance lifestyle purchases such as clothes, jewelry, expensive cars, holidays, or just to have a good time; these are expenses that should ideally be paid for with cash and not with credit or personal loans, as they quickly lose value and do not usually generate income or wealth.

Debt has become a necessary part of life but should be viewed as a tool to help you attain your financial goals. Using credit responsibly should help build wealth, provide greater opportunities, and enhance your quality of life; yet for those who borrow excessively and for the wrong reasons, debt can have dire consequences. Sometimes it makes sense to borrow; sometimes it doesn’t. Do give yourself some credit, but be careful.