The Art Of The Possible- A Debt-Free Life?

Olebile Makhupe | Monday September 20, 2010 00:00

The cost of accommodation has been going up year after year, so has transport cost, and basic food items, and school fees, the list goes on and on.

The big question then is, how do you still manage to save when you are caught in this perpetual poverty cycle?I will start with the premise that everyone has the ability to live debt-free or with manageable debt that is commensurate with their income levels. A bit radical I will admit, but true nonetheless. This requires a lot of self-discipline and sometimes sacrifices; but most importantly, you need to have the confidence to be yourself and to know who you are and what you stand for.

Keeping up with the Joneses puts a lot of people under pressure, as they see themselves having to look as good as their peers and friends (who may have higher incomes and fewer commitments).

Living within your means does not have to stifle your ambition to live a better life; it just means recognising that you may not be able to afford something now, but are willing to put in the extra work required to afford that item.

You need to differentiate between wise and not so wise borrowing decisions. Borrowing to meet your day to day expenses is never a good idea, even if you are expecting some income in the future.

You need to borrow only to fund creation of assets. Most of us do not know what the future holds for us, and it is advisable to create as much assets as you can while you still have the opportunity, as those assets can in handy when times are rough. You will then either have the option of selling the asset, or using it to secure cheaper funding or to work out better, longer repayment terms if the need arises.

Know your numbers. There is a big difference between paying a loan at 12 percent per annum and 50 percent per annum. If I can use a simple illustration of a borrower who approaches two banks for a loan of BWP 20, 000.00 repayable over a period of 1 year.

Bank A charges 12 percent per annum while Bank B charges 50 percent per annum. The monthly repayment at Bank A at 12 percent will be BWP 1,777 while the repayment with Bank B will be BWP 2,152.

The difference of almost BWP 400 that you could be directing to your savings account works out to nearly BWP 4000 in one year. The story gets worse as the repayment periods get longer and for higher amounts. This is a simple fact a lot of borrowers simply overlook, and one that ends up creating the never ending cycle of debt.

Know your numbers- investments. The argument above holds true for investment products too. You should always do a comparison of different investment returns and opt for the highest paying one. The extra money you make will always come in handy in the future.

Patience is indeed a virtue when it comes to finance matters- if you are in financial distress, remind yourself just how long did it take for you to get into that situation. In most cases, it takes years for someone to dig themselves into that heap of debt, therefore surmounting it cannot just happen in one day. You therefore need to set yourself a reasonable time-frame within which to get out of it. Identify which of your debts are the most expensive and concentrate all your energy on paying those first.

 The same goes with saving money- it takes time to accumulate savings, and having a clear plan and setting targets will help you manage your expectations. Think about this, saving just BWP 500.00 per month for a year will give you BWP 6, 000 at the end of the period, excluding interest paid. I'd bet most of us can sacrifice this token amount for future financial freedom.

Set yourself financial goals- setting yourself targets such as 'I want to have saved enough money to go on holiday at the end of the year', or ' I want to be able to pay a deposit of X on a house in 2 years', or 'Save for my children's school fees by the time they start school'  and so on can help focus you and give you a tangible goal to work towards.

After you make the commitment, you then need to make concrete steps towards achieving it, such as arranging for a stop order or direct debit with your bank to deduct and transfer the money on the set frequency to an account where you cannot touch it.

Olebile Makhupe is the Head of Global Markets at Standard Chartered Bank Botswana. For feedback and contributions please email-mymoney@mmegi.bw