Debt and you: Who is managing the other?

Conducting some training course last year on the outskirts of Lilongwe, I met a long time colleague who began by telling me how he enjoys my personal finance column articles. Typical of Malawians—they will almost always tell you they like your articles, your car, your office, your house, your wife, your children, your dogs. You then tend to wonder if everything about you is good. While this does help to boost your ego at the time you are told, sometimes you are not sure whether you should believe people or not.

But this friend of mine went ahead to point out that he finds it hard to save. On the contrary, he has accumulated too much credit over the years from banks and friends and he does not know which friends to approach anymore. You see, credit on its own is not bad but how you manage and use it matters a lot. Credit can either bring you misery if you did not plan for it properly or can generate you more wealth and great savings if well utilised.

Using credit today means you have confidence in your future ability to pay that debt. Forty years ago, your parents may have built for their homes and their cars with savings and not credit, a largely unheard-of occurrence today. If they borrowed money at all, chances are it was from a relative or friend, and not a financial institution, meaning there was no interest charged on the loans.

Today debt and instant credit are part of our everyday lives. The convenience of instant credit, however, has taken its toll. Many individuals use credit—or even katapila (usury)—to spend more than they earn, and a number of these people actually build themselves a debt prison from which some never emerge. On the other hand, those who never use credit can be denied a loan or credit when they have a justifiable need or use for it. Using credit establishes a history of financial responsibility: Until you establish a credit history, your chances of qualifying for an important loan, such as a mortgage, are greatly reduced.

To build a history of financial responsibility one has to strike a  balance between using credit wisely and staying out of overwhelming debt as well as paying the agreed instalments whenever they are due. Debt comes in many forms, and most types help us in our daily lives if used responsibly. Most people cannot buy a home without some financial help, and many cannot buy a car (new or brand new second-hand) without some sort of financing.

To use credit intelligently, start by examining the terms of the credit you are currently having. Keeping track of your total credit, the corresponding interest rates, and your current balances will help you to be aware of how you use credit money. Increased competition in recent years has led some lender companies to offer enticing features to attract new customers, including no annual fees and low interest rates for an introductory period.

If you think you are bearing too much debt, begin to address it by honestly evaluating your spending habits. Examine your existing expenses to analyse how your money is spent. You will most likely be able to identify the problem areas where you are more likely to be spending too much. Then, based on your current spending practices, create a realistic budget to pay off your credit balance debt in the shortest time possible while not adding any more consumptive debt to it. Next time you borrow, make sure the money works for you so it pays off the loan itself and even generates savings for you. Buy treasury bills, buy shares, start a small business. Don’t put the money in your bank’s idling current account.

Have a blessed weekend as you manage your debt not letting it manage you instead! n