6 things to do to get out of debt quickly

NAIROBI, KENYA: The average Kenyan household’s debt level has almost doubled since 2010, according to an HTM Capital survey done last year.

This can be attributed to how much easier it is to access loans through, for instance, mobile money platforms. It has never been easier to get smaller-denomination credit – which means it has also never been easier to accumulate debt. The antidote is in these six habits.

1. Keep it cash

Pay for everything in cash. Cashless systems encourage you to spend more because they rob you of the sensation of loss.

A study conducted by the MIT Sloan School of Management determined that credit cards actually increased consumers’ willingness to pay more for items. The average customer was inclined to pay 50 per cent to 200 per cent more for an item compared to a group without credit cards.

To protect yourself from the impulse to spend more on your credit card, leave it at home and carry just enough cash for your shopping. Limit yourself further by keeping a small amount of money in your mobile wallet. You’ll save more in the long run.

2. Pay more than the minimum due

Amortizing loans – which is where the amount you borrow is paid down over the life of the loan – like mortgages and Sacco loans often have a minimum payment. This amount is reflective of the interest charge due that particular month.

However, paying only the minimum balance means you leave a larger amount of principal outstanding on the loan. This principal amount continues to earn interest, frustrating even the best efforts to clear your loan.

Paying more than the minimum means that you reduce the principal outstanding, leaving a smaller base from which interest is charged.

Say you have a five-year Sacco loan charged at 14 per cent interest with a monthly payment of Sh23,628. Paying Sh25,000 monthly would reduce your interest costs by Sh42,000. You would also settle the loan five months earlier!

3. Pay off high-interest debt first

Credit card and mobile money loan balances accumulate faster than amortizing loans, like Sacco or mortgage loans.

Interest on credit cards and mobile money loans is typically charged on a monthly basis and added to the outstanding balance. Therefore, settling these loans before higher-value debts gives you the best value for your money.

4. Cut back on unnecessary spending

Big-ticket purchases are easy to avoid because we either can’t afford them or struggle to rationalise the purchase. However, these expenses are few and far between.

The single largest contributors to a debt problem are the little purchases that add up – lunch with friends at a coffee house, a dress at the mall, trips to the carwash, a workday lunch, drinks at the bar, and so on. Cutting back on this expenditure will save you more in the long run. Introduce small changes to your routine to cut back on these costs.

Start by carrying your lunch to work so you’re not tempted to spend. If your commute takes you near a coffee shop you can’t resist, take a different route home. If you’re visiting the mall, carry only cash instead of your credit card so you can’t spend more than planned. Lastly, wash your own clothes and car. Remember, haba na haba hujaza kibaba.

4. Ignore the competition

The desire to be a part of something and be accepted into a group is an inescapable part of being human. A study of lottery winners in the US found that spending on conspicuous displays of wealth increases whenever a neighbour wins the lottery or a large windfall bonus.

The converse is also true. The same study showed that whenever a neighbour or friend declares bankruptcy, the average savings rate for the group rises by 3.5 per cent. Clearly, our social circle can influence our lifestyle choices, for better or worse.

To reduce this influence, use your bank’s automated features to prioritise debt repayment, savings and investment. Whatever is left after these deductions is yours to spend.

You can also work together with your friends to attain common savings and investment goals in a chama and get yourself out of debt faster.

6. Exercise control

Do you absolutely have to have that product right now? Researchers say self-control is a muscle, so the more you exercise it, the better you get at using it.

Next time you visit the supermarket or mall and you’re confronted with a new must-have item, walk away immediately. Reward yourself with a small token to reinforce this behaviour. With time, you’ll find it easier to walk away from impulse purchases.

The writer is an investments analyst at Cytonn Investments Management.