Debt Management
By Joseph Wachira Kimani
Financial Advisor, I&J Insurance Agency
Are you in debt? The world is awash in a sea of debt. People, families, companies, and even nations are caught in a borrow-and-spend cycle that results in ever-increasing debt loads. There is a crude joke in Kenya that even a new born baby has a debt to some master somewhere on behalf of the government! For consumers, the path to insolvency often begins at a young age as they grow up witnessing their parents' struggle with their finances and paying off the mortgage or other loans. In this era of digital economy and technological advancement, and with the endless stream of advertising, "CRB listed? No money? No problem! Access cash in 24 hours" the idea that everyone has debt and that buying on credit is a normal and acceptable activity is reinforced.
How do you find yourself in debt?
- Today, the higher education the higher debt. For the young people, the slippery slope continues when they pursue higher education. Because paying for university, college or technical training in cash is unfeasible for most people, education loans are the only choice.
- Mobile phone loans and credit cards soon come into play to help you cover the daily costs of living. While your loans are accruing interest, mobile phone loans and credit card charging significantly higher interest rates than those on the education loans, putting you even deeper in debt.
- When you finish school, debt spending is further reinforced if you live in an area where you need a car to hunt for a job or commute to work or the social pressure ensures you buy the car to “fit-in” in a social class. This results in a visit to the auto dealer and by the time you leave the dealership, another debt has been added to your burden.
Your school loans, mobile phone loans, credit cards and motor vehicle loan are all working hard to eat into the earnings from your new-found job. Simply put, we are spending our future even before we begin living it.
How do we break this cycle?
1. The first step in the process of escaping this debt spiral is to stop borrowing money. Mobile phone loans and credit cards are often the lead culprit in creating consumer debt. Refrain from the mobile phone loans and put the plastic away. Pay in cash, write a cheque, or use a debit card to make your purchases. This way, you will see how much you are spending and when the money runs out, you stop spending.
2. Take a close look at your income and expenses. Track every shilling that you spend. Additionally review your income periodically and compare it to your expenditures. At the very least, you will figure out whether you are shelling out more money than you are bringing in.
With this two steps done, you have gotten to the road to recovery. Make a commitment to fix your financial problems and has taken the time to evaluate your income and your outflows, it's time to take a look at your lifestyle. Making adjustments in your lifestyle will allow you to implement a plan to put yourself on a firm financial footing.
3. If your financial appraisal revealed that you do indeed spend more than you earn, you will need to figure out a way to change that equation. While getting your cash inflows and outflows to a place of equilibrium, it may not be enough to solve your problems. You need to reduce your expenses to the point where you are generating a surplus Alternatively, you can increase your income. Generally, most people are more willing and able to cut expenses than to increase their incomes. Just keep in mind that changing jobs or monetising your side hustle may be viable options that can help hasten the timetable for reaching your goals.
4. Reducing your expenses by a meaningful amount may require some serious lifestyle changes. Housing and transportation are two of the biggest costs for most people. Moving to a less expensive residence is often a way to make a meaningful and substantial reduction in your expenses. It may cost a few thousand shillings to make the change, but the long-term benefits often outweigh the short-term expenses. Similarly, trading in your car for a less expensive vehicle can result in thousands of shillings per month in savings when your car and insurance payments, and monthly fuelling bills are reduced. Or, plug into a public transport system, you may be lucky enough to do away with the vehicle altogether.
5. Cutting back on discretionary spending. This is the most challenging for people who don't like to keep track of where their money goes each day. Even if you are not willing to make a conscious decision to closely evaluate your spending habits and cut out certain expenses, the simple act of paying with cash rather than credit can help you become more aware of how much you spend and how much you have left in your pocket.
The Next Steps
Now you have figured out a method of reducing your expenses or increasing your income to the point where you have a surplus each month, it's time to put that surplus to work.
- Start by giving some of that money to yourself. Instead of spending that surplus cash, stash some of it away for a "rainy day." It's the "pay yourself first" concept. Rather than using the money to buy more stuff, setting that money aside creates an emergency fund that you can tap into when you need money in a hurry. If that rainy day arrives and you do need to spend the money, replace it as soon as possible. Ideally, you will want to have enough money stashed away to cover at least six months' worth of expenses.
- Start paying down your debts. Here, are two paths to consider. The first, and most mathematically logical, is to pay off your highest interest debts first. This will result in the most financial savings, but if you have large debt balances on your accounts it may take a long time before you feel like you have made any progress. If that approach is simply too disheartening for you, consider paying off your lowest balance loans first. While less financially effective, this plan can be more emotionally rewarding. Once you've paid off one debt, you likely will be inspired to pay off the next one and the one after that. Although this approach is not the most logical, it provides faster progress which can encourage your new habit
Ultimately, Perseverance Pays Off
To break the debt spiral, you'll need lots of patience. Take the approach that motivates you to take action and stick to the plan is worthwhile. Remember, it took years, perhaps decades, to build up those outstanding debt balances. Recovery will be a similarly slow process.
If you find it hard to pay your debt and other bills each month, you may need to get help from a financial advisor who will help restructure your income and expenses as you seek to live a debt free life. An adverse action will be to file for bankruptcy. These all have advantages and disadvantages so weigh your options carefully.
Do you envision a debt free life? Let’s engage