Category Archives: Debt

The Debt vs. Savings Dilemma

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“I took out a home equity loan to consolidate two credit cards that had been maxed out and carry out repairs to my house. I am due to get a gratuity at the end of my contract which will be renewed in a few months. Should I use this money to pay off my debt or should I rebuild my savings?”

Let’s look at three factors that can help you to make the right decisions with your money:

The price of the debt

When borrowing money, many people only think how the loan proceeds will help them to take care of their immediate money needs, but don’t consider how the loan payments will further impact their cash flow. Very often, the loan that was supposed to solve their money woes only ends up adding to their financial distress.

One of the ways to resolve your debt vs savings dilemma is to examine the effect that your debt has on your monthly budget. Download a personal budget from the financial tools section of www.financiallysmart.org and fill out your expense and income details. This will help you to see if your earnings are currently able to fulfil all your spending requirements.

If you realise that your monthly loan payment is taking up a significant portion of your budget, and that it is hindering your ability to deal with other important expenses, then you should pay off your debt. Otherwise, you may be forced to go back to using credit cards to pay your bills, and you’ll end up in a worse financial position than before you consolidated your loans.

Another consideration is the interest rate on your debt. Although loan costs are relatively low at this time, the price of debt will almost always be higher than what you could earn on a secure savings or investment account. For example, if the loan interest rate is 12 per cent per annum, and your investment would net you an eight per cent return, then you would be better off without the debt.

The purpose of the debt

Let’s now take a look at the reasons you got into debt in the first place. Although you have not explained why you had two maxed-out credit cards, I will assume that you used them to deal with expenses that your income could not cover. Like most of us, you probably also made some unwise spending choices over the years, and got carried away with using your credit.

As I have said on many occasions, if you borrow to finance an imbalance in your budget, you will only start a long-term cycle of indebtedness. If your income is insufficient to meet your needs it is impossible to successfully utilise debt to take care of the shortfall. Borrowing will only make your situation worse, as the underlying problem has not been resolved.

As they say in Jamaica, “short cut draw blood”. And quick loan fixes will only sink you into a deep, dark abyss of debt. The only way to deal with an income shortfall is to cut back on expenses wherever possible or try to earn more to plug the holes in your budget. If this is your situation, get rid of your loan and ensure that you reduce spending or increase your earnings.

Unfortunately, you have replaced your credit card debt with a home equity loan. Credit cards are unsecured, as they are not covered by any form of collateral. This is one of the reasons why the interest rate is much higher. Although the home equity loan rate is lower, you will put your property at risk if you run into difficulties paying your loan. Pay off your debt to secure your home.

The pain of the debt

Money psychology plays an important part in how people make financial decisions. In addition to looking at the numbers surrounding your debt — monthly loan repayments, budget balances and interest rates — you need to look at the emotional aspects of your indebtedness. In other words, how does being in debt make you feel?

Fear, shame, powerlessness, worry and stress are just some of the negative emotions that are commonly used to describe how people feel about their debt situations. Very often, persons with a chronic dependence on debt can get into a state of depression that ultimately affects their work, health, and their relationships with family and friends.

Some people get a false sense of security from having money in the bank and expensive trinkets while maintaining large loan balances. However, if your assets value the same amount as your liabilities, in reality your net worth is zero. You should also understand that your interest payments are actually putting your potential wealth into the coffers of your financial institution.

Although you may be able to cover your monthly loan payments right now, your financial situation could take a turn for the worse at any time, thanks to a major health challenge or job loss. Therefore, it might be best for you to start afresh with a clean slate; pay off your debt and use the previous loan repayments to fund a new savings plan.

Copyright © 2012 Cherryl Hanson Simpson. No reproduction without written consent.

Originally published in The Daily Observer, July 19, 2012

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Cherryl is a money coach and business mentor, and founder of Financially S.M.A.R.T. Services. See more of her work at www.entrepreneursinjamaica.com and www.financiallysmart.org. Contact Cherryl

Continue reading The Debt vs. Savings Dilemma →

Pride Goes Before a Financial Fall

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“Pride goes before destruction, a haughty spirit before a fall.” – Proverbs 16:18 (NIV)

 Act 1: Pride – a high opinion of your own importance

Jonathan, a 34-year-old accountant, makes an average income and lives in an affordable rented one-bedroom midtown flat. He inherited a 2001 Toyota from his father, which performs reliably without needing major repairs. However, despite his reasonably comfortable existence, Jonathan is very dissatisfied with his present position.

Many of Jonathan’s former schoolmates have advanced rapidly up the corporate ladder, and now hold major positions in banking and product distribution companies. As the valedictorian for his graduating year at high school, Jonathan is painfully aware that most of his high-income colleagues were less-than-stellar achievers in school.

Every time they get together, Jonathan compares himself with his friends and thinks that he comes up short in every area. As they discuss the latest high-tech features of their high-end SUVs and share details of their recent jaunts to luxury resorts, he resents the fact that his income does not allow him to live the lifestyle that he thinks he really deserves. Continue reading Pride Goes Before a Financial Fall →

Money Mission: Get Out of Debt

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Over the past two months we have expanded on some of the key principles of money achievement that were outlined in our 2012 Money Manifesto.

Whether it’s budgeting, saving, setting goals, debt management, creating income, investing or estate planning, there are some basic steps that are non-negotiable if you want to create a successful financial future.

Of all the money principles I’ve identified, I think the one that proves the hardest to master is managing debt. I always receive the most heart-rending requests for help from persons who are desperate about their debt.

Uncontrolled borrowing can not only destroy the lives of individuals and their families, but devastate entire corporations and countries as well.

Continue reading Money Mission: Get Out of Debt →

How to Manage Debt Wisely

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Since the beginning of the year, we have been expanding on the elements of our 2012 Money Manifesto. It is possible to create the financial life that you desire by understanding and following the basic principles of money success.

In today’s column, we will take a look at the sixth component which speaks about dealing with debt. Let’s examine some key do’s and don’ts that can help you to manage debt wisely: Continue reading How to Manage Debt Wisely →

Breaking The Cycle of Debt

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One of the problems with money is that there never seems to be enough of it to buy all the things we want in life. However, the lack of funds doesn’t necessarily stop some of us from getting the things we desire. Thanks to our culture of credit, there are many sources from which we can borrow – bank loans, credit cards, payroll advances, and informal money lenders.

I can still recall my first loan transaction. After graduating from university, I wanted to buy my own television so that I could determine what I wanted to watch instead of depending on my parents’ viewing preferences. Even though I didn’t have any money to buy one, my mother had saved up enough money in my credit union account over the years to allow me access to a loan.

Thinking back on that experience in which I had to fill out forms, get proof of income and find a suitable guarantor, I remember that it made me feel important, as if I was doing a very grown-up transaction. It also felt great knowing that I could get what I wanted even though I didn’t have any money! Continue reading Breaking The Cycle of Debt →

Are You Tired of Being in Debt?

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“It’s the same story every month. I promise myself that I’m going to make a big dent in my credit card bill, yet within two weeks after payday, I’m forced to swipe the card to buy groceries. This month the car required major repairs and I just didn’t have the money to deal with it.

“It took me a long time to pay down $40,000JMD off my debt, but it disappeared in an instant after purchasing car parts. I’m sick and tired of owing this money; I feel like all I do is work hard to pay interest to the bank. When am I ever going to get rid of this debt?”

This heartfelt cry of a client who is stuck in a debt quicksand could easily have been echoed by thousands of concerned consumers who are similarly mired in a vicious cycle of borrowing to survive. Despite their strong desire to pay off their obligations, their financial reality makes it challenging to break free of the chains of debt. Continue reading Are You Tired of Being in Debt? →

The IMF and You

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When the International Monetary Fund (IMF) finally confirmed in February that a US$1.27-billion loan for Jamaica had been approved, it put to rest several months of speculation about the agency’s return to our country. Although there have been several debates in the media about the impact that the IMF agreement may have on our economy, many people are still not very clear about what these policies will mean to them.

Recently, the Jamaica Co-operative Credit Union League (JCCUL) hosted a public forum in St Ann, where topical financial issues were discussed. Denise Garfield, JCCUL’s corporate planner, delivered an insightful presentation outlining the role of the IMF and what the agreement will signify for Jamaica.

What is the IMF?

Garfield demystified the IMF by explaining that it was an organisation made up of 186 member countries, which have the ability to borrow from the fund when necessary. The purpose of the IMF, Garfield noted, was to foster global growth and economic stability by providing policy advice and financing to members facing financial difficulties. Continue reading The IMF and You →

2010 Action Plan #2: Control Your Debt

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Your child’s tuition is three weeks overdue and you’re dreading another phone call from the school office. It’s not that you planned to be delinquent, but the front end of your car finally gave way last month, and all your money had to be channelled into emergency repairs. Desperately looking for an answer, you notice a newspaper advertisement for a payroll loan.

Convinced that this may be the answer to your problem, you call the financial company to get more details on the loan. You realise that you can access enough funds to not only pay the outstanding school fee, but to clear off your credit card and repay your cousin the money you borrowed eight months ago. In fact, you decide that you might as well take the opportunity to finally replace your worn living room sofa.

Does this scenario sound painfully familiar? If so, you’re not alone. For many cash-strapped consumers, borrowing money to finance budget shortfalls is standard operating procedure. Continue reading 2010 Action Plan #2: Control Your Debt →

Six Smart Sayings to Help You Manage Debt

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One of the most challenging aspects of managing your personal finances is knowing how to control debt. It’s very tempting to start borrowing – how else can you survive if your salary remains stagnant but the cost of living continues to skyrocket? It’s also hard to maintain a frugal lifestyle when today’s society places a high value on material things.

Many people think that the quickest solution to having insufficient funds to buy what they need or want is to get a loan. While short-term borrowing might temporarily ease the immediate situation, it usually starts a long-term problem that is hard to resolve.

Wouldn’t it be great if there was a simple manual to guide you on the appropriate strategies to manage debt?

This week, I compiled six valuable sayings to help you to remember some important principles about borrowing money. There is a lot of wisdom in these clever adages, and reciting them can be an effective way of memorising the underlying messages about debt. Continue reading Six Smart Sayings to Help You Manage Debt →

Is declaring bankruptcy an option?

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Christmas is traditionally a season of merriment and relaxation where we normally get to let go of our concerns and just enjoy ourselves. However, this year many people are so focused on their financial challenges that they are finding it difficult to have fun. Some are extremely anxious about expanding debt positions and impending job losses, and wonder how they are going to turn around their finances.

In the United States, it is fairly common for people who have been overwhelmed by debt to file for bankruptcy. According to Businessdictionary.com, bankruptcy is the legal procedure for liquidating a company, or property owned by an individual, which cannot pay its debts out of current assets. In Jamaica, only individuals file for bankruptcy as companies are placed in liquidation or receivership.

Is declaring bankruptcy an option for average Jamaicans who are mired in debt, and have no means to pay it back? I asked the Office of the Trustee in Bankruptcy to enlighten us about the process. Continue reading Is declaring bankruptcy an option? →