My Money

Olebile Makhupe | Monday January 10, 2011 00:00

In the past we have discussed different investment allocation strategies and how best to maximise your investments to protect them from erosion by external factors such as inflation and market fluctuations.

While many people have deemed this useful, most still lament the inability to find those extra Thebes to allocate to an investment plan.

There just never seems to be enough money to go around, what with those bills to pay; school fees, day-to-day living expenses and the occasional treat or lifestyle upkeep expense that we have convinced ourselves is so essential. 

While a rational solution may be to find ways to increase your income to cover all these 'needs', the ease of access to credit in this market naturally gravitates most of us to approach a bank or money lender for a loan to help us make ends meet . 

Borrowing money to spend on consumables and not on income-generating ventures or assets that can appreciate in value has never been and will never be a good strategy. So how do you manage your debt to enable you to save for future financial freedom?

Step 1 : Face your enemy ; admit your debt burdenThe first step is to acknowledge the amount of debt you have accumulated. What is the balance on your mortgage, personal loans, credit cards, overdraft, furniture or clothing store account, small loans from relatives and friends or even motshelo?

Do you have any overdue commitments such as unpaid utility bills or rent payments that count towards money that you owe?

Get a piece of paper and write down all these debt amounts so you can know what your overall debt position is.  It can be a sobering exercise to be confronted by  just how indebted you are in relation to your income.

Step 2 :  Consider the cost of each debtIt is very important to know the rate of interest being applied on each of your debt commitments. Government institutions that regulate financial institutions mandate commercial banks and other institutions that lend money to disclose exactly what rate of interest will be applied on all advances or loans. Are you aware that even store account charge interest that they have to disclose to you? Consider other costs such as bad credit reports that may come with unpaid bills...these can be hurtful in the future. 

Step 3; Formulate a PlanWriting down your goals on paper makes them more real and can ensure there is greater commitment to meeting them.  Following on the above two points where you analysed the size and cost of each debt, you now need to decide on some of the following points: is it good to have more than one personal loan?

Should you consider consolidating those small furniture loans and credit cards into one loan and negotiating a better rate on the loan? You should be looking to paying off higher cost loans first. Set yourself a short term target which could be finding the best way to whittle down your debt commitments to make them easier to manage, such as debt consolidation. A medium term goal could be to reduce your overall debt by a certain percentage, and a long term one could be having just one reasonable mortgage loan or being debt-free.

Step 4;  Getting down to actionWe've already discussed in past articles the need to have a budget plan to better account for your income. Fit in your revised debt management plan on your overall budget. How much can you afford to squeeze out of your current budget plan towards reducing your debt without compromising your ability to save for a rainy day, or without compromising your happiness?

Once you've committed to a goal and are mentally prepared for the adjustment to your monthly expenses, put a firm arrangement in place to service your debt.

This could be in the form of a direct debit or an increase on your monthly stop order. It's easier to commit to and get used to an automatic deduction than having to make the transfer yourself, whether you have to walk into a bank or electronically.

Step 5; Enhance your incomeDo you have any special skills that you can use to supplement your regular income? Is there any part time job that you can take up that doesn't compromise your current employment contract? If you are an accountant, can you work with smaller companies that may not afford the services of a full time accountant? Can you offer supplementary tutoring services for students in your field? Can you do an evening job in a restaurant?

Step 6: Is that treat justified?Depending on your debt situation, you need to assess whether the treat that you've convinced yourself that you deserve is really good for you? If you have been living off debt and suddenly get a bonus, thirteenth cheque or a cash present from a relative, are you justified in spending all that money on a treat such as a holiday or a shopping spree? Wouldn't you rather dedicate most or all of it to reducing your debt burden?

You might miss out on those fun trips your friends are taking now but will afford a more fulfilling holiday in the future when you are debt-free. With dedication and commitment, that future doesn't need to be too far off.

Step 7; Take stock of your progressYou should periodically assess your strategy to see if it is working. Six months down the line, assess whether you are more aware of how much you owe and at what cost, whether consolidating your debts has made it easier for you to manage them, whether you have been able to divert any extra money towards debt reduction, and whether you owe less money than you did before you embarked on your plan.

Don't be discouraged if you have not made as much progress as you had hoped---go back to the drawing board and try and see what could have been done better. The most important step can be the desire to do something about your situation.

Olebile Makhupe is the Head of Global Markets at Standard Chartered Bank Botswana. For feedback and contributions, please e-mail-mymoney@mmegi.bw