By Elizabeth Akinjole
For generations, debt has been associated with being in a financial handcuff. Many see debt as a bad choice of finance. To them, nothing good comes out of borrowing. Well, this is true to a very small extent. In a previous article, I talked about 8 Vital Money Lessons and one of the lessons was the debt talk. Debt can be used as a tool of finance. Therefore, an effective debt management strategy could be a way to financial freedom.
Before I go into the nitty gritty, it is important to establish what debt is.
Debt is money that a person or an entity owes or is required to pay to another, generally as a result of a loan or other financial transaction. Debt can be further divided into two parts; bad debt and good debt.
A debt is said to be good if it is used to invest in an asset such as property, education, stocks which (although not guaranteed) may generate income over time, and/or grow in value, so you can sell it for a profit at a later date. In this case, the revenue generated from the asset can be used to pay back the loan gotten in the first place.
On the other hand, bad debt is money you borrow to finance things that have no financial gain, such as day-to-day expenses, like groceries, also most especially things like clothes and holidays.
For effective debt management, you must consider the following tips.
1. Borrowing with a purpose: Don’t just take a loan because it is available. Borrow with a clear goal to improve your overall financial well-being. It is also important to have a clear plan to pay back what you owe.
2. Monitor Interest Rate: An essential part of a debt is its interest rate. This is also called the cost of borrowing. Make sure you have a piece of adequate knowledge about the interest rate in your country and take advantage of low-interest rates. Do not be too eager to take a loan. Take your time and shop around for a better deal.
3. Pay Off High-interest Debts first: If you have accumulated some significant amount of debts from different sources, note to pay off the high-interest debts first regardless of the amount of principal ( the amount originally borrowed).
Make a debt list showing the creditor, the total amount owed, monthly payment, interest rate, and maturity (due) date. Then prioritize and rank them in the order in which you want to settle them. It is a common practice to pay off the lowest balance (which can serve as a motivation). However, it is advisable to pay off high-interest debt first because it is costing the most money.
4. Know your limit: Like the typical Nigerian would say ” _no go dey do pass yourself_ “. Understand what you are capable of paying back and how to go for debt within your limit.
This is easily determined by your budget, thus you can expand your debt limit by increasing your income or cutting down on your expenses, or doing both.
5. Develop a budget to track your expenses: A budget is an essential finance tool. A budget can help you stay out of debt, and it can help you climb out. It lets you know how much money you earn and where that money is going.You can create a skeletal budgetthat allows you to pay for necessities like your rent or utilities. Set aside everything else to pay off your debt as quickly as possible. Always make sure you stick to your budget to avoid running into unnecessary debts.
6. Build an Emergency Fund: The importance of an emergency fund can not be stressed enough. Rainy days are inevitable– thus, you must stash funds for these days. Without savings, you are likely to run into debt when unforeseen circ*mstances arise.
First, work toward creating a small emergency fund. Gradually make it your goal to create a bigger fund. Eventually, you want to build up a reserve of three to six months of living expenses. This way you could avoid accumulating more debt.
The above tips can enrich your knowledge on how to manage debt effectively if you have one or more debt balances you need to settle. If you run into trouble or can’t develop an effective, plan for managing debt yourself, then it is advisable to get professional help.
