BY KIMBERLEY HIBBERT

Career & Education reporter

hibbertk@jamaicaobserver.com

ONE of the most ardent wishes of many people is to become debt-free. But getting there isn’t easy. To some, it might seem out of reach; others may be an inch away from having no debt, and of course, there are those people with no debt, but no sense of how to manage their finances.

Regardless of your situation, we all need to understand how to manage our finances and the importance of having little or no debt.

Janice Holness, executive director of the Financial Services Commission, said while living within your means may sound cliché, it is the foundation people have to set to reduce debt.

“First and foremost, live within your means. Separate the wants from the needs and avoid life choices that are beyond your control as these will impose financial obligations on you that you are unable to afford,” Holness said. She added that budgeting, though it may seem hard, is the basic formula that when strictly followed, will take you to your debt-free goal in due time.

Other steps to being debt-free include:

Having your debt proportional to your income

Holness said the average consumer as opposed to a business or corporation satisfies their financial obligations from their disposable income.

“Your debt must be proportionate to your income [debt to income ratio]. The fewer obligations you have to honour from your income, the more you are able to save toward a comfortable existence and a sound financial future. Chief among those is your retirement,” she said.

Holness added that while we live for today, we must save for tomorrow and if 60, 70, or 80 per cent of our disposable income is going towards paying down debt, we will be unable to save properly.

Prioritise

According to Holness, the ideal is to be debt-free, but we do not live in an ideal world and since all debts aren’t created equally, we should be vigilant in choosing which ones we take on.

“There are some debts we would take on in proportion to our income over others, for example, a mortgage instead of credit card debt amassed buying shoes and designer clothing,” she said.

She added that Jamaica now has credit bureaus and they collect information from financial institutions on our financial relationships with these institutions.

“The credit profile or history developed will determine if we are good or bad credit risks which also determines the interest rates on our mortgages, personal loans, credit cards, among other things. Lower interest rates mean lower payments, which translate to more available funds to save or take care of other life events, some of which are unplanned,” Holness said.

Spend wisely

“What is the difference between these two scenarios: 1. High debt which gobbles up all the disposable income with no opportunity to save; 2. No debt but all disposable income is spent on stuff on a cash basis with nothing left for savings? None. So the focus is not just on having no debt. You can have no debt and still have a bleak financial future because your disposable income is being blown away in another way,” Holness said.

Save

Holness encouraged people to make a budget and stick to it. Part of your budget should include a slot for savings where 10 to 35 per cent of your pay is being saved, regardless of your expenses. You can sacrifice doing your nails, buying new clothes every month, or getting the latest gadgets.