Debts are like children - begot with pleasure, but brought forth with pain.
~ Molière
Introduction
Before you brush off this article because you're probably making good money and feel like there's no way the little borrowing you do could be a big deal, allow me to highlight a story I saw on Reddit. Meet Paul (not his real name), a twenty-something-year-old guy. At the time of writing the post, he had an income of about 7k (Kenyan Shillings) with debts totalling around 200K in personal loans, and even more in student loans. You might wonder how he got here, but from his story, it was a mix of poor financial management and unforeseeable life happenings. Despite earning above 70k a month for a while, he would only save a maximum of 2k. As times got tougher due to the general political climate and economic situation, instead of revising expenditure, Paul turned to digital lenders, eventually falling into the cycle we described in Part I, creating a culture of borrowing even when it wasn’t necessary and needing to borrow to service existing loans. He gives some cautionary advice—you can check the full post here.
If you know a Paul in your life, send them this entry as we will be looking at how to evaluate your debt and if you are considering debt what the characteristics are of good and bad debt. We shall also be sharing strategies that you can use to manage any existing ones so they are less of a burden.
Evaluating Your Debt Situation
If you have loans and do not yet have a strategy for them, assessing your debt status is a critical first step in developing a plan to manage and eventually eliminate them. Here's how you can get started:
Visualise your debt: Begin by compiling a comprehensive overview of your debts, including outstanding balances, interest rates, and repayment terms. This will serve as your roadmap for understanding the scope of your debt and identifying areas that require attention. Include money owed to family and friends as well. This can be done simply with pen and paper, or you could use a digital dashboard as seen below.
Break Down Key Components: Take a closer look at each debt to understand its individual impact on your financial health. Consider factors such as interest rates—higher rates can indicate more urgent debts to address—and repayment terms—longer terms may result in higher overall interest payments.
Calculate your Debt-to-Income Ratio: This is the percentage of your income that goes towards your debt repayment. Doing this frequently will enable you to track the progress you're making towards being debt-free and can also help you make decisions on future loans and negotiate terms in your favor. Additionally, note any penalties on defaulted payments. For the sake of my mental health, I'm not on twitter (x) much but from what I have seen the digital lenders are notorious for strict penalties that can catapult you into a financial crisis.
Utilise Online Tools: Leverage online tools or apps to streamline the process of tracking and managing your debts. Many financial management apps offer features specifically designed to help users track their debts, set repayment goals, and monitor progress over time. Very soon, we shall have Money Moves personal finance tools available for you on our upcoming website, but for now, you can use this one.
Identifying Bad Debt
In our journey to understand debt better, it's crucial to recognize the signs of potential bad debt, which can lead to financial instability and long-term consequences. Here are four key indicators to help you identify if you're dealing with bad debt:
Non-Essential Purchases: Using credit to finance non-essential purchases, such as luxury items or extravagant vacations, is another red flag for potential bad debt. While these purchases may offer immediate gratification, they often do not contribute to your long-term financial well-being and can lead to regret and financial strain.
Struggling to Make Minimum Payments: Consistently struggling to make minimum payments on your debts is a clear indicator that you may be in over your head. Ignoring minimum payments can result in late fees, penalties, and damage to your credit score, further worsening your financial situation.
Borrowing to Cover Basic Expenses: Relying on borrowing, whether through short term loans or overdrafts (fuliza) to cover basic living expenses like rent, groceries, or utilities, is a concerning sign of potential bad debt. It suggests that your income may not be sufficient to cover your expenses, and relying on credit to bridge the gap can lead to a downward spiral of debt accumulation.
By recognizing these signs early on, you can take proactive steps to address and mitigate potential bad debt before it escalates. It's essential to assess your financial situation honestly and seek assistance if needed to develop a plan for managing and reducing your debt burden.
What about Good Debt
While bad debt can weigh you down, not all borrowing is created equal. Good debt, when used strategically, can serve as a powerful tool for building wealth and achieving financial goals. However, it is also important that we point out that what is good to one person could be bad for another and these points should be applied to your specific context. That said, here are some key characteristics to help you distinguish good debt from bad:
Investment in Future Growth: Good debt is often used to finance investments that have the potential to generate long-term returns, such as education or starting a business. These investments can increase your earning potential and contribute to overall financial stability. However, to my point earlier not all education/business loans are good. Say for instance taking out an academic loan for a qualification you have not intention of practising or leveraging. Granted we don’t always know what we want to pursue career-wise (She types, as her law degree stares from the bottom of the book shelf).
Aligned with Financial Goals: Good debt aligns with your overall financial goals and priorities, whether that's advancing your career, building equity through property ownership, or investing in a business venture. By borrowing strategically to support your goals, you can accelerate your progress towards financial success.
Potential for Positive Returns: Investments financed with good debt have the potential to generate positive returns over time, whether through increased earning potential, appreciation in asset value, or business profitability. By carefully evaluating the potential returns on investment, you can make informed decisions about leveraging debt to achieve your financial objectives.
While good debt can be a valuable tool for building wealth, it's essential to approach borrowing with caution and consider the potential risks and rewards carefully. Good debt is still debt and needs to be managed as it can and will turn into bad debt if improperly handled. And even if it doesn’t it still creates a financial responsibility that might induce stress/anxiety therefore should be approached with ration.
Practical Tips for Debt Management
Now that we've talked about good and bad debts, let's look at some practical ways to handle your debts better. Whether you're like Paul and are dealing with lots of loans weighing you down or you're using debt wisely to reach your financial goals, these tips can help you take charge of your money and build a brighter financial future:
Make a Budget: Start by making a plan for your money. Figure out how much you earn, how much you spend, and how much you owe. Then, make a budget that fits your goals. We have a budgeting course to help you with this for this reason and you also get to join our community for even more support.
Pay Off High-Interest Debts First: If you have several debts, focus on paying off the ones with the highest interest rates first. This will save you money in the long run and help you get out of debt faster. You can try strategies like committing your cash windfalls(large, unexpected sums of money) to these repayments e.g. bonuses, cash gifts etc
Think About Debt Consolidation: Debt consolidation means putting all your debts together into one payment. This can make things simpler and might even save you money on interest. There are different ways to consolidate debt, like getting a new loan or using a balance transfer credit card. Make sure you talk to different banks and financial service providers to find a plan that best suites you.
Talk to Your Creditors: Don't be afraid to talk to the people you owe money to. They might be willing to lower your interest rates or work out a new payment plan that's easier for you to handle. If you don’t ask the answer will always be no.
Get Help if You Need It: If you're feeling overwhelmed by your debts, don't hesitate to ask for help. A financial advisor or credit counselling agency can give you personalized advice and support to help you figure things out. Feel free to respond to this newsletter if you’re not sure where to start or email us at moneymoveske@gmail.com
Learn New Skills: Consider learning new skills to increase your income. This could mean taking online courses, attending workshops, or getting certifications. The more you can earn, the easier it will be to pay off your debts and reach your financial goals.
Remember, it's all about taking small steps in the right direction.
Bottom Line
Regardless of how much you earn or how insignificant your borrowing may seem, managing your debt is crucial for your financial well-being. By evaluating your debt, distinguishing between good and bad debt, and implementing practical strategies like budgeting and prioritizing high-interest debts, you can take control of your financial life. Every step you take towards managing your debt brings you closer to financial freedom and peace of mind.
WEEKLY ROUND-UP
In this round-up, let’s have a look at some interesting news from around the world.
The Founder of Binance is about to be the richest inmate in the US, with an estimated net worth of $33B, after being sentenced to 4 months in prison - Read more.
If you are considering money laundering (we do not recommend), SA might not be the place to risk it as nine individuals have been sentenced to a total of 10,939 years in prison for crimes such as money laundering, fraud, and forgery. Read more about the case here.
Will Eminem stans run to crypto.com now that he is advertising them? Find more details here
Estimates ranging from $21 billion to potentially hundreds of billions are at the center of demands for France to repay Haiti for a debt originating from post-independence reparations, aiming to support Haiti's recovery efforts amid ongoing turmoil. Read more.