Let me take this opportunity to wish everyone a Happy New Year. I know, we are already 12 days into the New Year, but the year is still relatively young. Welcome to our first edition of #FinanceFriday for 2017. For the next few weeks we will focus on Managing debt. While it would be great if we could all afford to save the money required to purchase all the things we want in life, this is not practical for most. So what’s the alternative, DEBT! Something we can refer to as: a “necessary evil”. However, even if we must borrow in order to achieve our goals, debt must NEVER control us, we MUST CONTROL debt. Debt used wisely enables us to achieve our goals faster than we would if we tried to save up for them.
Some of the more common reasons people get into debt include:
1. House construction/purchase
2. A new/used vehicle
3. Education
4. Vacation
5. Home furnishing
Things to know before going into debt:
1. Debt Service Ratio: It is important to consider how much is realistic for you to borrow based on your salary/earnings. It is advised that payments for your debts should not exceed more than 40% of your salary.
2. Term: While a lower payment may be preferred, you should know that the longer the term, the lower the payment, and the higher the interest cost to you.
3. Security/Collateral: The less security you provide, the higher would be your interest rate.
4. Credit Worthiness: It is beneficial to have a good reputation when it comes to repaying your
obligations. If you develop a bad reputation when it comes to repaying your loans (being bad pay), it
can affect your ability to borrow in the future.
See tips for improving your spending here
It is important to know that some debts are more important than others. Borrowing for a home or education may make more financial sense than borrowing for vacations or clothing, which are consumed quickly. It may be more beneficial to save for the latter items rather than charging to credit cards or taking a loan for them. If however, you must charge to your credit card, it is recommended that you accumulate the required funds, charge the payment to your card and pay it off in full before the due date to avoid any interest charges.
See you next week when we will continue our discussion on managing debt. We will look at the different features of some of the different types of debt and explore how you can control the amount of interest you actually pay for debt.
Until next time……. Gerlan
