Analysis: PETER SICHINSAMBWE
LIVING debt-free is a dream many strive for, but the reality is that very few earn enough money to buy life’s important assets such as a home, car or university education with cash savings. Most of us are raised to believe that all debt is bad, but this is not necessarily true. It all comes down to whether the debt you are incurring is good debt or bad debt.
Most young people in Zambia are in debt in the form of personal loans, temporary overdrafts, student loans and car loans and the lending rates range from 18 to 25 percent.
The cost of borrowing in Zambia is very high and not conducive for business and the economy. For example, a personal loan of K100,000 at 24 percent interest in four years’ repayment period, will attract interest of K56,548.16 for the period, with a monthly repayment of K3,261.42.
This is very expensive and make it impossible for many citizens to qualify for a loan in most of these financial institutions.
You made it through university, you have a job and getting a regular decent salary.
The temptation to spend money on looking good, being seen at the coolest clubs and driving the latest car is overwhelming.
That’s why so many young Zambians are finding themselves in debt despite earning decent salaries.
The youth of today are described as tech-savvy, interested in branded clothing, high-end gadgets such as cellphones, tablets, watches, HD television sets, music systems and with the appetite for apartments in upmarket areas, regular food takeaways, and the result is more and more credit being taken out to fund their lifestyles.
Social media also plays a role in driving young people to spend heavily on glamorous lifestyles.
Young people allocate a good portion of their available resources to their image, that is, hair, make-up, expensive clothing, bags and shoes.
The distinction between valuable debt and financial loss can help you determine spending priorities.
Always ask yourself whether incurring the debt will improve your long-term financial future.
For example, think of a bond used to purchase a home – with low interest rates, and as long as you bought wisely, your property should grow in value so that at the end of the loan, you have a tangible asset with a monetary value that outpaced what you originally paid for it, including the interest on the loan.
A student loan is another example – getting a tertiary education is likely to secure you a higher future income as a skilled individual.
If you’re in a position to obtain part-time work while studying, make a point of paying off as much as you can afford on your student loan each month.
That way by the time you start your professional career, your loan could already be paid off, or at a minimal balance which is a huge head-start in life.
Good debt is used to generate long-term value that provides you with an asset at the end of your loan term and increases your net worth. In other words, it has some investment value.
Bad debt typically has high interest rates and is usually incurred to fulfil a want, rather than a real need, and does not leave you in a better financial position. Good or bad, too much debt of any kind can leave you trapped in a financial crisis.
If you are considering taking on any type of debt, do a thorough financial assessment and make sure that you can afford the repayments and the costs that come with the credit finance.
Pay special attention to the terms of the loan, and any special conditions, the interest rate and the cost of credit life insurance which most loan providers make mandatory as a condition of the loan.
Make an effort to understand the financial implications of any debt you plan on taking on, and always ask yourself whether incurring the debt will improve your financial future. If the answer is no, then you’re better off without it.
If you find yourself in debt already, there are steps you can take to address it before it’s too late.
The first thing is to get rid of the habit that got you into debt. Work out a budget, and service your debt the moment you get paid.
If you have extra money left over at the end of the month, pay off more of the debt. With short-term debt, the interest rate is so high that it’s best to service that debt as a priority.
It’s difficult to fulfil your dreams and aspirations without sound financial planning. If anything falls outside your budget, don’t be tempted to buy it; even if it’s payday. Save first, don’t spend first – it’s a good habit to delay instant gratification.
In Ecclesiastes 11: 9 the Bible reads, “Rejoice, O young man, in your youth, and let your heart cheer you in the days of your youth. Walk in the ways of your heart and the sight of your eyes. But know that for all these things God will bring you into judgment.”
Also in Ecclesiastes 12:1 the Bible reads: “Remember also your Creator in the days of your youth, before the evil days come and the years draw near of which you will say, I have no pleasure in them.”
The Bible encourages us to enjoy our youth at the same time to be responsible and conscious of our actions.
Change depends on an individual’s willingness, and ability, to make tough choices.
God bless this great country Zambia and its leadership.
The author is an economist/chartered accountant.
Analysis: PETER SICHINSAMBWE