Over the holidays, I saw this hilarious but very profound anonymous quote on Instagram…. “Blessed are those who finish their December salary in December for they shall know the true meaning of endurance in January”. It made me laugh because in my “past life” I could relate to the quote; however, it also got me thinking real hard.
January is, oftentimes, the toughest month of the year for most people; and this is generally because of a lack of financial planning and financial discipline. It also doesn’t help that everyone wants to “turn up” at all the high profile events, wear expensive clothes e.t.c without the adequate means to pay for these expenses. As a result of excess spending in December, a lot of people tend to borrow money to survive in January and this has a ripple effect on all the other months of the year. As critical as this is, it is only a small piece of a very big problem in our society.
As our economy and country develops there is increasing access to debt. The other day I saw an advert from a company encouraging people to borrow money to go on holiday with their families. A lot of financial institutions also encourage people to borrow now, and pay later. Commercial or retail outlets encourage customers to buy now and pay later; thereby encouraging people to pursue ‘instant satisfaction’ as opposed to ‘delayed gratification’.
Whilst it is nice to go on holidays with family members and wear nice clothes etc, it is better to pay cash for these expenses, than incur debt to finance these expenses.
I read an article in Forbes, where a young entrepreneur had the privilege of meeting with some of the wealthiest entrepreneurs in the world, one of which was Bill Gates. He asked Bill Gates what he does with his money, and Bill Gates said he hires very good investment experts to invest his money for him. The interest he receives from his investments is what he uses to buy nice things. This is a principle a lot of us should learn and adopt.
It also doesn’t help that there is also increasing access to credit cards which are considered one of the worst debts you can incur due to the fact that credit cards accrue the highest interest rates .
What a lot of people don’t realize is that they would fall into a debt trap that would be very difficult to get out of. This also has adverse effects on their emotional and physical health. It is not surprising that in developed economies; a lot of people commit suicide or fall into depression due to the fact that they are heavily indebted.
Now, don’t get me wrong, not all debt is bad. There is good debt and there is also bad debt. The important thing is to know the difference between ‘good’ debt and ‘bad’ debt.
Good debt is debt that is incurred for investment purposes or incurred to acquire an asset. Assets are essentially, valuable items that increase in value or generate cash flow such as property, land etc. Good debt can also be debt incurred to invest in or start a business or to obtain higher educational qualifications.
For example money borrowed from family, friends or a bank to fund a start-up company can be considered good debt as long as the interest being paid on the loan is lower than the return expected from the investment. This is why many wealthy individuals that own big organizations have debt in their portfolio.
If Zainab needs N200,000 to start a business that would give her a return on investment of 60% but she has only N50,000. In order to be able to finance the business Zainab approaches a bank to lend her the balance of N150,000. Zainab obtains the loan at an interest rate of 20%. This is good debt because Zainab’s expected rate of return of 60% is more than the cost of debt of 20%.
Another example of good debt is taking a loan to finance the purchase of a home i.e. mortgage.
The important thing to note here is the cost of debt i.e. interest rate. The interest rates in Nigeria are considered very high compared to other economies.
Bad debt is any amount borrowed to finance liabilities or consumables. Liabilities are items that decrease in value and reduce cash flow. An example of a bad debt is incurring debt to purchase a car. This is because once a car is driven out of the car shop, the car immediately depreciates in value and it would also cost money to maintain this car, thereby reducing the car owners cash flow. Another type of bad debt is debt incurred for the purchase consumables like clothes, shoes, appliances, vacations etc.
Based on the above, if an individual is going to incur debt at all it is better to incur good debt however it is better to be debt free than in any debt at all. It is better to save to acquire an asset than to borrow, that way you would be earning interest instead of paying interest.
If you are in debt, do not despair, you can be debt free in 2015. The first step to solving a problem is admitting there is a problem in the first step. There are a lot of people who were once in debt and with the right strategies in place are now debt free. A very good example is the case of Sola Afolayan, a young lady in her mid-thirties. In January, 2014, Sola, requested for financial coaching servies to enable her pay off her debt of N4.5 million. Within nine months, Sola was able to pay off her entire debt. Below are 8 practical steps you can apply to become debt free in 2015.
Believe it is Possible
It all starts in the mind. You have to first of all decide that you want to pay off your debt. You also have to believe that no matter how big your debt is it is possible to pay it off. Paul Martinelli says, “When your belief matches your potential then your life will change”. “Your results reflect your belief”. “You cannot out-perform your own self-belief”.
Make a conscious decision not to incur any more debts. Develop a ‘No cash, no purchase’ mentality.
Create a Debt Schedule
Create a list of all your debts. You can decide to arrange them in order of priority or from the least to the highest or vice versa. There is something therapeutic about listing out your debts as it puts everything into perspective.
Develop a Monthly Budget
Determine how much you money you have available to pay off your debts by creating a monthly budget. The budget would also help you decide which expenses to reduce and cut-back on. As you cut back on your expenses you can decide to increase the amount of money you set aside to pay off your debts. “The man who never has enough money to pay his debts has too much of something else” – James Lendall Basford.
Start Now, Start Small
“How do you eat a five ton elephant? One bite at a time – Anonymous. Start paying off your debt. Start with the smallest debt first, this is because it is more achievable and you would be encouraged to continue once you pay off the first one. You would be encouraged to keep keeping on. On the other hand some debts may be more urgent than the others; you can also decide to pay the most urgent debts first. You can also decide to approach your creditors to let them know that you are committed to paying off your debt. For corporate debts you can restructure your debts and request for a reduction in interest rate or a longer tenor.
Multiple Streams of Income
You should consider creating multiple streams of income to enable you pay off your debt earlier.
Have an Accountability Partner
Share your goal to be debt free with your spouse, friend or a financial coach.
Learn, Unlearn, Re-learn
Seek financial knowledge. Read books on personal finance, financial planning, debt, money etc. There is a lot of free information on the internet that would help you.
No debt is too great. Remember the journey of a thousand miles begins with a single step. When you become debt free, your potential is limitless. You can have a better quality of life and standard of living. You can pursue your dreams and goals. You can save more, and invest more. You can give more and you can live more. You can live longer and live happier and healthier. Wouldn’t you want that to be your story?
I hope you choose to DO IT AFRAID and be debt free in 2015.