Debt Management

 

Debt Management: Effective Strategies of Overcoming the Trap and Shame of Debt

With the proliferation of digital money lenders and introduction of "easy-to-get" e-loans, many people have fallen victim to bad debts leading to devastating consequences like suicide, separation or divorce, depression, family conflicts, decreased productivity at workplace and collapse of institutions. By the end of 2021, 4.6M Kenyans were listed in CRB (up from 3.2M in 2020 and 2.7 in 2019) save for the presidential directive on delisting those with less than Kshs.1M. This dire situation calls for the need to learn how to overcome the trap and shame of debts

Five critical questions to think about

1. What does the term debt refer to?

2. What does it mean to be trapped by debts?

3. How do people become trapped by debts?

4. How can we overcome the trap of debts?

5. What are the dos and don'ts about debts?

1. Demystifying the concept of debts

The concept of debts is best captured by Dave Ramsey's quote, "We buy things we don't need with money we don't have to please people we don't like." This means we borrow money to buy unnecessary things like household goods, personal accessories, cars, phones, go on holiday etc. to impress other people.

Debt means money we borrow from friends, siblings, relatives, banks, Chama, Sacco or digital lenders for a particular purpose (investment or consumption). Debt can be good or bad depending on what you use it for. Debt isn't bad but it depends on the purpose for which we borrow money e.g. to acquire a home, build rentals, to invest in financial markets or put in business - if the returns can make you pay the debts with ease.

Debt can be bad if you buy things that depreciate in value e.g. expensive household items, personal accessories, a car you don't need etc. This means the debt cannot repay itself.

Q. Is the money borrowed to pay school fees, pay medical expenses, or bail out somebody in jail a bad or good debt?

Debt can be acquired for three main reasons: to address an emergency, invest in profitable ventures and fund a fanciful lifestyle.

A vicious cycle of debts means one is enslaved as he or she borrows from A, then B and C. When debt A is due, one turns to lender D to repay and so on. One can't do anything profitable as all the money goes to repay debts and meeting recurrent expenditures.

2. Why do people get trapped by debts?

The trap of debts has financial, social and psychological effects. We are going to focus on factors which make people get into the trap of debt.

i. Lack of financial plan. No short-term, medium-term and long-term goals; no spending plan or budget. This is tied with lack of a definite goal or purpose for acquiring a debt.

ii. Lack of impact analysis. Somebody borrows because he/she qualifies. Failure to do a cost-benefit analysis can make one to borrow without know the actual cost of the loan and returns of the investment project.

iii. Internal influences. Internal influences are dictated by one's personal desires, emotions and money personality (the giver, serial debtor, miser and ideal investor).

iv. External influences are from friends, colleagues, family members, neighbours, to fund a fanciful lifestyle.

v. Unclear repayment plan. Failure to ask the right questions and read the details in small font when taking up a loan can have dire consequences.

vi. Diverting funds to other unintended purposes. Indebted people usually make the big mistake of diverting debts fund unintended goals like consumption, helping somebody in distress etc.

vii. Allure of get-rich-quick schemes like betting and Ponzi schemes that offer the promise of instant riches traps some in the shame of debts.

3. How can we overcome this trap of debt?

i. Having a clear purpose and financial plan. Lay out your short-term, medium-term and long-term plans. Before you take loan, assess your repayment plan, security required and cost of the loan (principal plus interest).

ii. Acquire personal financial knowledge. It will help you master your money and make the loans you acquire work for you. It will also enable you to understand your money personality and strategies to overcome your financial habits or beliefs.

iii. Live within your means. Don't be moved by what others are doing. Don't borrow expensively to fund an expensive lifestyle. Work with a budget as a spending guide that will help you cut down on unnecessary expenses.

iv. Accepting the situation. Don't live in denial and hide from those who matter in your life. Share with family members or close friends. Accept, Adjust and Advance (3As).

v. Consult a financial expert. Remember you didn't steal but borrowed. Thus seeking professional help is important for psychological healing.

vi. Explore alternative sources of financing. Before going for any debt, learn to save first because your savings will become your nest egg. Other sources of funds include borrowing other people (friends, family members and relatives), and venture capital.

Note. If you find yourself trapped by debts, accept the situation, make adjustments on how to repay the debts, don't run away from debtors and advance by going forward to start following your repayment plan. Remember the easy-to-get digital loans well packaged by digital money lenders are a way to trap you in debts.

Dos about debts

You should do the following to overcome the debt trap:

1. Set clear financial goals and specific timelines.

2. Understand your money personality and endeavour to eradicate bad money habits.

3. Assess the cost-benefit analysis, security required, and repayment period.

4. Always work with a budget and track your money.

Don'ts about debts

1. Don't borrow because you qualify

2. Don't be influenced by your personal desires or other people.

3. Don't be easily cheated by adverts or easy to pay digital loans.

Parting shot

Debt can be good or bad depending on the purpose you use it for. Debt can trap you psychologically and financially. Once in debt don't run away out of shame, just face your creditors and negotiate how to repay your debts. Yours shouldn't be a slave to the lender. I have tackled the subject of the trap and shame of debt in Chapter 4 (page 44 - 54) of my book, Mastering Your Money, I would recommend it to viewer to get a copy for more information on debt management.

Mastering Your Money Exercise

1. Before borrowing ask yourself: "Is the debt necessary? Am I using it to fund a lifestyle? How I'm going to repay the principal and total interest?

2. Action Matrix. Make a list of all the debts or loans you have currently, then set a repayment schedule. State against each loan what you used it for and what influenced you to take it.