opinionBy Sylvia Juuko
Consumer debt is arguably one of the most challenging aspects of managing our finances. People who had a bad experience with debt usually focus on getting money for consumption rather than whether they can repay.
However, there are two sides of the coin when it comes to debt. If you acquire debt to invest to generate income, that is considered good debt. On the other hand, when you borrow money to spend on consumables that decline in value, then debt becomes bad, especially if you cannot meet your obligations.
Most successful entrepreneurs will recommend that you only get into debt if you are going to engage in productive ventures where profits will repay the loan. The ability to leverage debt takes business acumen. Borrowing money to finance acquisition of property comes in handy, given that lots of people can hardly afford outright purchases. The advantage with this kind of debt is that over a period of time, your property's value will rise.
Unless you master the difference between these two categories of debt it's likely that you will get in trouble with borrowed funds.
A good number of people are struggling with debt because they borrowed for consumption. This means that their income is constrained because of the high repayment amounts.
For such people, it is in your interest to make personal debt history. It is possible to get out of debt if you commit to it. You can cut your personal debt if you have a mindset shift as well as change your lifestyle.
Note that you cannot reduce debt if you are an impulse shopper who gets soft loans to purchase consumable items. This is one habit you need to drop, going forward. You can use the New Year as a starting point to make some changes in your money habits.
First, you need to examine your lifestyle. If you cannot be true to yourself and live within your means, you will be compelled to borrow to sustain your lifestyle.
Secondly, you have to make a debt reduction plan that clearly spells out the dates within which you can realise this goal. Then, list what you owe and rank it according to the most urgent. If repayments are already slicing away a huge chunk of your income, there is no alternative but to seek other sources of income to meet your obligations. I am assuming that you borrowed with the intention of repaying that money.
There is a culture of non-repayment that afflicts many borrowers. While you are repaying your debt, it is not advisable that you take on new loans because you will find yourself in a cycle of debt that you cannot extricate yourself from. Supporting your lifestyle on borrowed funds can take a toll not only on your finances but health, because playing hide and seek with your debtors is as straining as it is demanding. You are not only putting yourself at risk but also your household.
One other way to discourage yourself from borrowing for consumption is to consider the number of extra hours per day that you need to put in to repay. Or the number of days it is putting you further away from your financial freedom goals.
Remember there will always be people or institutions enticing you to borrow money. Whenever you come across such deals as yourself what the borrower is getting out of this. This will give you a clear picture of the cost of this money. Even when you are borrowing to invest, you have to pay attention to the cost of the money and the terms of repayment vis-à-vis your venture. Always remember that if you take on high consumer debt, the further you are away from achieving financial security.
The writer works with
Bank of Uganda