Business

Controlling your debt is key to financial success

BY TAMEKA GORDON Assistant business co-ordinator tamekag@jamaicaobserver.com

Sunday, December 30, 2012    

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TAKING a loan for that vacation that all your friends are going on equals borrowing money to spend money; and that makes it a bad debt.

Controlling you debt, instead of having it control you, is a key factor to financial success. And taking control of your financial life could be as easy as recognising which debts make sense, and which ones do not.

Those who have not been financially prudent have found themselves in a sea of bad debt and continue to miss financial targets.

A good way to start controlling your debt is to recognise the difference between good and bad debt.

"Bad debt is any debt that will not bring about any further income," explained, Mayberry Investment's Kwame Smith.

An investment in real estate made possible by a loan, however, is a "good debt" as Smith explained since real estate appreciates in value.

"Borrowing money for consumption or to make regular purchases is a very bad idea," Smith cautioned but, "if you borrow and then invest what you have borrowed to get a higher return, that would be a good debt".

Some financial advisors, however, see every debt as a something to be avoided.

"All debts are bad in the sense that you become obligated to repay, at a price, that which you borrowed," says Joel Gordon, capital investment manager of BCW Capital.

For Gordon, while all debts are bad, "there are good loans and bad loans".

"Unless that loan adds some value over the long term, such as the equity built up over time in a home, the utility of a vehicle to take you to work or school, or a student loan that, at the end of a college career, will most times have you realise superior earnings, it's just not worth it," he said.

But whether it's a bad loan, or a good loan for a bad purpose, most Jamaicans will recall being schooled by parents to avoid borrowing.

Unlike North America, the culture of debt locally carries negative connotations, especially personal debt.

Though this is likely to change soon, with the introduction of credit bureaux, which will inform creditors of the debt history of their prospective clients, Gordon contends that the culture of not wanting to borrow is not entirely a bad thing.

"If you can create a situation where you can do without debt, that is always the best bet," Gordon advised.

Albeit sound advice, Smith reckons that debt accumulation will invariably occur as one seeks to acquire assets which makes debt management a key skill to master.

"Failure to initiate and utilise an effective debt management strategy results in an ever-increasing liability, where new debt is used in an attempt to reduce old debt," Smith cautioned.

So, what can you do to get out of debt? The advisors suggest consolidation.

Most financial institutions offer debt consolidation which, in essence, means a new company pays off the debt then the borrower repays the new company in smaller more manageable payments.

Debt consolidation, by Smith's reckoning, "frees up financial resources" which can now be channelled into "investable income" to generate additional funds to assist with ridding oneself of the overall debt.

"Spending should not be an option for someone in debt," Smith cautioned, adding that financial responsibility and restraint are key behaviours that must be cultured if one is to become debt-free.

Like money, debt is a good servant. Smith also suggests that the skilful use of debt is another good strategy to regain control on one's financial standing.

For example, mortgaging a property to generate rental income and additionally create equity over time is a good debt-management strategy.

"Using debt to increase assets and investment capital sets the foundation for future investment and growth", he said.

Gordon agrees with debt manipulation as a strategy to maintain a handle of personal finance.

"Debt should be avoided at all costs, but if you do have to enter into a debt arrangement, it has to work for you, he said.

As with any other aspect of life that induces stress, the emotional and mental strain caused by debt should never be overlooked.

The financial advisors captioned that some practical fiscal discipline could save you some sleepless nights.

"Make a budget and stick to it," cautioned Charles Ross, managing director of Sterling Asset Management.

Before adding discretionary spending such as entertainment, prioritise expenses ensuring that debt serving obligations rank foremost, Ross cautioned.

Additionally, try to pay more than the minimum balance due.

"There is no penalty for paying early," Gordon said noting that using bonus sums or payment to pay off or cover a significant portion of your debt should be considered.

But foremost on the list of cautionary notes is, to simply "live within your means", Gordon stated.

Using your talents to create new streams of income is also a viable option.

"The more streams of income, the better able you are to manage your liability," Smith added noting that these streams could be included into you investible income.

So, with sacrifice and fiscal prudence you should be well on your way to freedom.

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