GETTING OUT OF DEBT

I was recently invited to give a talk to a certain SACCO on the use of credit.  The reason the officials of the SACCO got in touch with me was that despite their impressive growth in numbers, majority of their members did not seem to be participating or investing in the various property projects that the SACCO was availing to them. They were of course making use of the credit facilities but not for the investment opportunities that the SACCO had assumed they would, but instead to support their lifestyles. The SACCO had even come up with a product called “fuel advance” because so many people would actually request for funds for fuel.  This money would be lent for a month at 10% per month!

The “fuel advance” has many forms.  It can be the credit card, salary advance, pay day advance (that several banks are now advertising), school fees advance, perpetual credit line with the loan shark, personal loan etc that we use for various expenses. Not all debt is bad but the particular debt, being discussed in this article that I call “Lifestyle Debt” is what gets a lot of people in trouble and is BAD DEBT. The consequences far outweigh the short term gratification it gives you. Generally why we get into this form of debt is that at some point expenses exceeded income, the imbalance never recognized or corrected and  the constant need to keep borrowing. If you are accumulating any of the above loans,  you cannot afford your lifestyle. To find out create list of what ALL your monthly expenses are including current monthly debt obligations, compare it with your income.  If expenses are more cutting down is not an option, it is a must. Another loan is never the solution. What has been happening is that you have been paying for these expenses using some form of debt and that is why you are in trouble. When it is more important to take an expensive fuel advance, continue driving rather than take public transport, your perceived lifestyle has become more important than the consequences. The consequences are over time expensive interest charges – money you could have invested, saved and grown, heaps of loan or advance deductions from your monthly pay leaving you with barely enough to survive on and loads of stress! If you can’t fuel the car how will you service it or repair it when it breaks down?  It is a perceived lifestyle because when you do the math’s you cannot afford it.  It has become more important to be perceived to “be doing well” rather than “actually doing well”.

To get out of this debt trap several steps need to be taken:

1)    Leave your ego at the door and stop accumulating any more debt. It’s not about how you look and you will not get out of debt by trying to continue looking good, successful etc. Face the fact that you are in a rut despite the mask you have put in front of people.  Make hard choices such as take public transport, forgo the drinks you have been invited for that you usually swipe the card for etc.  Leave the credit card at home if you know you can’t resist temptation.

2)    List ALL the debt that you currently have.  If you were to pay back this debt today, what is the precise amount you would need to pay back.  When people do this exercise in  our course, the first reaction is always the same i.e. FEAR! It can be scary but once you are aware of it you have no choice but to actually deal with it.

3)    Look for extra funds and accelerate debt repayments.  Just because you have been given a specific amount to pay per month does not mean that is the only amount you can pay. In last week’s article I used an example of how carrying packed lunch can save about Kes 10,000 a week.  Another student mine had taken a Kes 1 million loan for 5 years at 15%.  By putting Kes 10,000 towards additional repayments he saved Kes 160,000 in interest charges and finished paying the loan not in 5 years but 3 years.

4)    Start putting these extra repayments towards the shortest debt first i.e. the one that will take the shortest period to pay back. If you go after the longest debt you may tire quickly.  This method gives you a quick sense of achievement that you need to keep going.  In addition it releases funds back to you faster (you will now have the funds you were using to service that debt as well as the extra repayment that you put in available to you) that you can use towards paying off the next debt or if you are stretched some can go back into your necessary expenses. Remember to work on one debt at a time as you continue making your minimum repayments into all your other debt obligations. Do not default! Note this debt repayment method can be used for even other debts not  specifically mentioned today such as investment loans, car loans, mortgages etc.

If you did not take any more lifestyle debt today, what do you think would happen. Can you survive without more debt ? Send your comments and questions to my contacts given below.

Waceke Nduati

Waceke runs a program on personal financial management. Find her at waceke@centonomy.com| twitter @centonomy| www.facebook/centonomy

Question and Answer

I have Kes 300,000 and not working at the moment.  Where should I invest this money so it can grow and keep me going?

You need to keep this money safe as it must cater for expenses until you find another source of income.  You can’t afford to have the value go down so consider vehicles like bank deposits that will earn you some interest. Also survive on minimal expenses until you find a source of income.

My husband and I are both working but I want to take a loan of Kes 500K to invest in an old matatu. We are struggling financially and this can generate extra income for us.

Will the business be able to service the debt? Who will manage this business as you are both working? Since it is an old matatu what will the maintenance and repairs cost you? What will be the monthly income of the business versus the expenses.  Don’t be in a hurry because without proper research and information, the business will just end up being another debt burden to you.

The only way I can cater for school fees is through loans.  I’ve done the budget you talked of and it just doesn’t add up with all my expenses. Help!

You have to decide which expenses must go even if it is changing schools. If you continue paying school fess through loans, one day you will exhaust your ability to borrow for even that school fees. It is simply not sustainable. Alternatively find ways of creating additional income outside employment that can fund fees and start helping you pay down debt using the method we have given today.

Waceke Nduati

The author runs a program on personal financial management. Find her at waceke@centonomy.com or on twitter @centonomy.