Keeping debt under control

By Tania Ngima

It is said that good debt is that which is incurred to purchase items that go up in value and bad debt is for items that depreciate on or after purchase. However, being saddled up with too much debt, even if it falls under the ‘good debt’ category is likely to hurt your financial health.

The recently operational credit referencing by the Central Bank authorises lenders to collect individuals’ credit histories to come up with credit ratings, which in turn affect borrowers’ interest rates. It is therefore imperative to hold only good debt and keep even that good debt down to manageable levels.

Manage ‘free money’

Unless it’s a say, lottery prize, chances are it’s not free money. Bonuses, pay raises and service awards may seem like free money but are not since they represent a return for time and energy we have put into work.

Instead of upgrading your lifestyle to match your new bank balance, decide on how much you will spend on non essentials.

For instance 10 per cent or 20 per cent is a good figure to go by; decide on how much of the rest you’ll put into savings, investment or large ticket purchases.

Assets

It is a fact that houses appreciate in value. However, unless you’re one of the very few people who can afford to pay cash for a house, you will most likely take a mortgage. There are a few factors to keep in mind while applying for a mortgage:

• Avoid getting into the 100 per cent financing trap that mortgage providers offer. The higher the debt you get into, the higher the interest you will pay and the longer your finances will be tied up.

• Even though you may qualify for a rather substantial amount of mortgage, don’t borrow as much as you can. If you buy a house that stretches you financially, it leaves you with much less options should you have an emergency or lose your income.

• Raise as big a down payment as you can. Consider saving up some more money than the pre-requisite 10 per cent asked for by the lender.

If you’re unable to do this, ensure that your contract has a ‘no penalty’ clause for extra payments and try to put in repayment money any time you have some extra funds.

Lifestyle choices

When it comes to shopping and hobbies, cultivate other ways of relaxing other than by spending money at the mall or engaging in retail therapy.

Impulse purchases may give a momentary rush but the effects on your wallet are bad in the long-term.

Instead of upgrading electronics and appliances, consider getting high quality pieces that will serve you over a long period of time and take good care of them to they last longer.

Don’t take up financing to purchase or upgrade cars. Granted, a car may feel like a necessity, especially with the frustration that comes with our less-than-reliable public transport. But going into so much debt that you’re left without wiggle room is not a good idea.

If you have to get financing for a car, go for a well maintained second hand model that will not put your other financial goals such as savings and investment at risk. You will be able to clear a smaller debt faster.

Also, a new car depreciates much faster, starting with a 15 per cent drop immediately you drive it out of the showroom.