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Is runaway debt giving you sleepless nights? Experts advise that individuals should not borrow more than a certain percentage (35 to 40 per cent) of income earned. This law of budgeting and personal finance, if broken, will swiftly bring upon you penalties, which will be felt both in your pocket and your level of happiness.

According to Marcia Reid-Grant, assistant general manager - retail banking at the National Commercial Bank (NCB), ignoring this benchmark and overextending oneself with borrowing will divert funds from other important needs.

With the original principal and accumulating interest to be repaid, you will find that available funds that should be used for other purposes have to be redirected to servicing debt.

It would really have been better to do without whatever was the cause of your over extension.

But, sometimes, individuals do find themselves pressured into taking funds on loan to meet their needs. Whether to acquire debt or not is a question that most will have to consider at sometime. To help you to review the best and worst reasons for borrowing, consider the following tips from Reid-Grant:

Good reasons to borrow

1. Used wisely, borrowing is an excellent source of funds to invest in one's future, e.g. to acquire real estate (which usually appreciates in value), or to pay for education.

2. Borrowing is justified to consolidate or refinance existing high interest rate debt at a low rate.

3. Borrowing may be your best bet in order to handle an emergency.

Ideally, it is much better to have an emergency fund, i.e. save a bit each month, but sometimes it is not possible, or resolving the emergency will cost more than what is in the fund. The borrower should try to find the lowest interest rate possible and try to repay in the shortest time.

Reasons not to borrow

According to Reid-Grant, reasons not to borrow are:

1. Paying your everyday expenses. If you do have to borrow to pay your monthly bills you are spending more than you are making.

2. Covering optional or impulse spending. If this happens, you are getting in debt to acquire something that is not necessary at this time or something that can be deferred until enough savings are accumulated.

3. Borrowing when you know you cannot afford the payments. If the addition of this loan to your total debt accounts for more than 35-40 per cent of your gross income, you cannot afford it.

Remember to avoid over-extending yourself at all cost.

Bad borrowing habits, Reid-Grant notes, can lead to your becoming trapped in a cycle of taking money from future earnings to meet current needs. For example, if you are earning just enough to meet your monthly needs, taking a pay-day loan can push you into this cycle.

Such habits can also damage your credit history or rating if you have to miss or delay a payment for any reason. The more you borrow, the riskier you are perceived to be by lenders and the higher the interest rates you will be required to pay to borrow additional funds.

Keeping your debt-service ratio in mind will also prevent you from overextending yourself. Imagine being turned down for a mortgage to get the home of your dreams just because your debt ratio is too high!

Avia.Collinder@gleanerjm.com