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:

Do: Utilise credit for financial gain

Shakespeare declared “neither a borrower nor a lender be”, but in today’s world it’s almost impossible not to borrow at all. Some forms of debt can be considered beneficial if the interest expense can be justified by some future monetary benefit. It’s as if you are getting paid to borrow, as the returns will eventually pay for the interest cost.

Borrowing for education can be useful if it helps you to get ahead in your career and increase your income. Buying a house with a mortgage is another good debt option as the appreciation in property value will usually compensate for the mortgage interest. Borrowing for business purposes can also be rewarding if the returns on the investment can cover the cost of the loan.

Don’t: Borrow for frivolous spending

Consumer credit is the use of debt to finance spending habits instead of funding investments for your future. This form of debt cannot pay for itself as it is not backed by a growing asset; instead, the interest expense paid is a transfer of your potential wealth to a financial institution. In fact, consumer debt very often lasts longer than the item bought with the loan.

Borrowing to sustain a lifestyle beyond your means will definitely lead to financial challenges. It is impossible to resolve a budget shortfall by borrowing from family and friends, or using payday loans and credit cards. If your income cannot meet your bills, you will only create an endless cycle of borrowing; the only solutions are to increase your earnings or to reduce your expenses.

Do: Use a budget to determine your debt threshold

A borrowing decision should always be made after consulting your budget, to ensure that you can really afford the loan. Put the monthly payback into your budget and see how it affects your ability to meet your other expenses. Most financial institutions require your debt repayments to be no more than 30 per cent of your income; but with today’s economy I would suggest 15-20 per cent.

It’s also important to consider your current financial situation before you decide to borrow. Do you have any additional expenses coming on the horizon? Do you have a consistent income stream? Don’t lock into long-term obligations if you’re unsure about your income or the economy, and don’t depend solely on expected future income to pay your loan.

Don’t: Incur unnecessary fees and charges

If you’ve decided to take out a loan, check around for lending institutions with the lowest interest rates and processing fees. Ensure that you always pay your bill by the due date to avoid late-payment penalties, and if the due date doesn’t fall on a work day, pay it before. If you use a credit card try to pay for all your purchases by the required date, or within the shortest time possible.

Here are some other tips on using credit cards wisely: Call or check on the Internet to verify how much credit you have available on the card, so that you avoid being charged an over-the-limit fee; never use your credit card for a cash advance, because interest will be immediately calculated from the date of withdrawal until the repayment date.

Do: Focus on reducing debt

If you’re over your head in debt, it makes no sense hiding from your reality. If you have multiple loans, itemise them on one sheet of paper, outlining information such as loan balances, monthly repayment amounts, interest rates, time period left to repay and any collateral backing the loans. Download a debt tracker at www.financiallysmart.org.

Find extra funds to pay down your debt, focusing on the smallest loan balance first. You can cut back on non-essential expenses, raise money by having a garage sale, liquidate your collateral assets to get rid of the monthly debt burden, or use a lump sum like a partner draw or bonus to pay off outstanding balances. Consolidating loans may also be an option to reduce high-interest debt.

Don’t: Ignore your obligations

It’s very important for you to have an attitude of urgency when it comes to paying off all your obligations. Too many people are indifferent or insensitive in their approach to debt repayment, making comments like “that person has plenty of money, I don’t need to pay them back,” or “I’m not earning enough so I’m not going to service my loans.”

This mind-set will actually cripple you financially, as there is a universal law that ensures that you get back what you give out to others. If you withhold what rightfully belongs to other people, don’t expect that you will have long-term prosperity. Even if you’re struggling with other expenses, prioritise your debt, make a budget sacrifices and trying to earn more to deal with your obligations.

Cherryl is a money coach, business mentor, and founder of Financially S.M.A.R.T. Services. Her upcoming book, “The 3 Ms of Money” will reveal all the secrets she learned about financial success. Get more advice on money and business matters at www.financiallysmartadvice.com and www.entrepreneursinjamaica.com. Email comments to cherryl@financiallysmartonline.com.