Oran Hall | Alleviating the pressures of personal debt
While there are many enjoying good financial health due to the personal and business loans which they assume, there are many who are licking the wounds resulting from poor borrowing decisions or from their reduced ability to service their debts due to changed circumstances.
From the questions I receive from the readers of this column, the types of debt that seem to create problems most are credit card debt – by far – and money borrowed to purchase personal-use assets such as motor cars.
Sadly, most readers seem to realise that they have a problem only when it is very obvious that they have one – when the lender begins to apply pressure. On the other hand, some borrowers who realise they have a problem pretend it does not exist or that it will just go away.
It is important to recognise when a debt problem is emerging. Here are some of the signs:
- When you are using an increasing amount of your income to repay debt;
- When you are depending on overdraft facilities to pay recurring bills;
- When you are using cash advances on your credit card to pay other bills;
- When you tend to make only the minimum payments on your credit card;
- When you are borrowing to pay basic bills – utility bills, for example.
Other signs include when your cheques are returned by your bank for “insufficient funds” or “refer to drawer”, when your credit card declines because you have exceeded your limit, and when the collectors keep calling. The last is more than a sign; it is the real thing.
Not all debt situations are serious. Sometimes they are temporary due to loss of a job, sickness, or overspending that has not become chronic. These can be addressed with new employment, restoration of health, and an effective cash-management programme directed at reducing spending and or increasing income.
Some situations are more serious and require serious adjustment, and the process of restoring financial balance generally requires some lifestyle adjustments to make funds available to eliminate the debt.
Assuming a new debt at lower rates and with longer repayment terms can help, but this is often only a temporary fix. What is required is a permanent fix – not just breathing space.
Temporary fixes can be so deceptive. They ease the pain but do not necessarily remove the cancer of poor money management – which must be addressed if good financial health is the long-term sustainable goal.
Readers often ask how they can repair their credit. The obvious answer is: repay the debt and maintain an excellent record.
There are three ways to reduce and eliminate debt: increase income to generate funds to service it, reduce expenses for the same purpose, or combine both.
Here are some ways to earn more income: .
- Use your skills to generate income where possible. Hobbies can turn out to be attractive ways to generate additional income;
- Increase your non-cash income by doing yourself some of the things you normally pay others to do;
- Evaluate your investment portfolio to see if it can generate more income;
- Get a part-time job, and, if possible, get a better-paying job.
You could even take the radical step of liquidating some of your savings and investments to reduce your debt. Although this may seem to be a setback in the short term, careful analysis may show that it is advantageous to do so as the cost of the debt could be more than your investment returns.
You could also sell other assets to generate resources to clear or reduce your debt.
To reduce spending, start by cutting unnecessary expenditure and spend only on necessities. Next, reduce or eliminate discretionary spending like entertainment. Doing so will not harm your basic lifestyle.
Reducing your required expenses may prove to be more challenging because they are at the heart of your basic lifestyle. Some of these are fixed and others are variable. It is easier to adjust the variable expenses. Food and utilities are variable: you have some control over the level of their consumption.
It may be necessary to reduce some fixed expenses – rent, for example. Relocation to an area where it costs less in dollar terms may help, though you may not like how it may look socially. But at the end of the day, what do you want?
If you have more than one debt obligation, make eliminating or reducing the most expensive one the priority if you can do so without doing harm in regard to the other obligations, and if you are indebted to more than one lender, explore debt consolidation. This is not a cure-all and comes with some initial expenses, but explore it and see if it is beneficial.
In the case of credit card debt, if you have assets against which you can borrow, why not negotiate a cheaper, fixed-term loan to kill that debt?
Borrowing money is the easy part. Honouring your commitment to pay the principal and interest in full and on time is not necessarily easy. Considering the far-reaching implications of having a poor credit rating. It is imperative to be wise when borrowing money.
- Oran A. Hall, the principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and counsel. email@example.com