Analysis: MAXWELL PHIRI
THIS is the generation where we see people retire with huge debts and under worst case scenarios, they start sourcing for money to clear the debts whilst in retirement. Ridiculous indeed!
Have you not noticed that the debt collectors business has mushroomed in great numbers in this era? Common sense will tell you that the debt collectors are now on demand due to huge debts which some retirees have incurred and failed to settle.
One of my lawyer friends tingled me regarding the high number of cases on debts he is handling. During our conversation, he said most of the people will have their “debts outlive their life”. Then I asked him what he meant by that. He simply explained to me that at the current level that employees are borrowing from commercial banks, employers and micro-finance institutions, without taking into consideration the debt ratio ceiling, which in some cases is distorted, most people may pass on to glory with huge debts.
The Bible in Proverbs 13:22 reads: “A good man leaves an inheritance to his children’s children”, meaning parents should not leave debts to their children but wealth.
What we see now is that children are being stressed by the debts which their parents left after retiring from active service. According to Proverbs 13:22, retirees should reach a level where their grown-up children start managing their real estates, instead of managing their debts. Some retirees are making the life of their children more stressful. Debts are not bad in themselves, but it is the management of debts which is stressful, hence it is very important that 10 years before someone’s retirement, one should start eliminating his/her debts.
Dave Ramsey highlights seven baby steps to financial debt-free life and peace:
• Baby step one: US$1,000 cash in an emergency fund (However, this will depend on the income of someone, it can even be lower than US$1,000.
• Baby step two: Use the debt snowball to pay off all your debt (This method has been explained in detail below).
• Baby step three: A fully-funded emergency fund of three to six months of expenses.
• Baby step four: Invest 15 percent of your household income into retirement.
• Baby step five: Start saving for education.
• Baby step six: Pay off your house loan early.
• Baby step seven: Build wealth and give generously.
BABY STEP ONE: SAVE $1,000
The first step Ramsey recommends is to start an emergency fund for those unexpected events in life you can’t plan for.
BABY STEP TWO: PAY OFF DEBT (SNOWBALL METHOD)
It’s time to get out of debt! List all your debts except the house, in order, from the smallest balance to the largest. Your smallest balance should be your number one priority.
BABY STEP THREE: EMERGENCY FUND
This step is all about building a full emergency fund. Ramsey recommends having three-six months’ worth of emergency savings.
BABY STEP FOUR: INVEST 15 PERCENT
Now it’s time to get serious about retirement. With no payments and a fully-funded emergency fund, put 15 percent of your income towards the retirement of your dreams.
BABY STEP FIVE: SAVE FOR EDUCATION
Education tuition and housing expenses continue to rise. Don’t let school fees sneak up on you. Saving now will put you ahead of the game when your kids graduate from high school.
BABY STEP SIX: PAY OFF YOUR HOUSE LOAN
Perhaps the most exciting of Ramsey’s baby steps, number six is all about paying off for your house.
BABY STEP SEVEN: BUILD WEALTH & GIVE
This is the last step and, by far, the most fun. It’s time to live and give like no one else! Build wealth, become insanely generous, and leave an inheritance for future generations. You know what people with no debt and no payments can do? Anything they want! And it’s all because you had discipline for a few years. Now, that’s leaving a legacy.
Let us now critically look at baby step number two (Debts snowball method), which is very critical in the journey of coming out of debt.
Here is how the Debt snowball method works:
It is a debt reduction strategy where you pay off debts in order of smallest to largest, gaining momentum as each balance is paid off. When the smallest debt is paid in full, you roll the money you were paying on that debt into the next smallest balance.
Step 1: List your debts from smallest to largest.
Step 2: Make minimum payments on all your debts, except the smallest.
Step 3: Pay as much as possible on your smallest debt.
Step 4: Repeat until each debt is paid in full.
DEBT-FREE AT LAST!
More details on debt management in readiness for retirement will be availed during the seminar we are organising next month.
Yes, it is possible to be free from debts and use the surplus to build your retirement pool. Start now!
The author is director – human resources and administration at the Rural Electrification Authority and a seasoned pensioner advisor.