One of the thoughts that give people sleepless nights is the Big D–debt. Debt, conjures up feelings of shame and anxiety in those who have it. Admitting to debt is akin to revealing that one is suffering from an incurable chronic illness. Simply put, debt is the boogie man of personal finance. A survey conducted by Money and Mental Health Policy Institute in 2019 found that, “Almost half (46 %) of people in problem debt also have a mental health problem.”
Nearly 5,500 people with experience of mental health problems took a Money and Mental Health survey. Some 86 % of respondents said that their financial situation had made their mental health problems worse. Finance gurus classify debt into two categories, good debt and bad debt.
Personal finance expert Janet Alvarez defines, good debt as “’money owed for things that can help build wealth or increase income over time, such as mortgages and business loans.” On the other hand, bad debt refers to items like credit cards or other consumer debt that do little to improve your financial situation.” How are you able to tell if your debt is good or bad? Here are five red flags that you have bad debt and remedies you can implement to clear it.
1. Frequent calls from collection agencies
A collection agency will only be involved if your debt is overdue and has triggered concerns about defaulting. Inability to service a loan may lead to unhealthy confrontations with lenders, weighing heavily on one’s mental and emotional well-being.
2. Making minimum payments
Making minimum payments is beneficial to the borrower because of the flexibility it offers. However, lower debt payments are designed to keep people in debt for longer, therefore racking up higher interest rates.
3. Minimum monthly payments are large and scattered
If you are paying the minimum amount to several creditors, it is advisable to add up all the monthly payments so that you can have a clearer picture of how much you should dedicate to paying off the debts monthly.
4. Juggling bills
When one is unable to service recurrent monthly bills, it could lead to a situation of borrowing from Tom to pay Peter. It signals the accumulation of debt beyond one’s ability to service them. Therefore, there is a need to cut back on unnecessary expenditure.
5. Debt affecting personal relationships
Hiding your debt situation from your partner or loved ones speaks volumes about your debt situation. Start by being honest with yourself about your financial situation and then develop a payment plan.
POSSIBLE SOLUTIONS
Below are five remedies you can implement to achieve financial freedom.
1. Debt Avalanche
Debt avalanche involves paying off debts by prioritizing those that attract higher interest rates first. For instance, if your highest-interest debt is a bank loan with an annual interest rate of 13% that loan should become your primary target, while continuing to make minimum monthly payments to other existing loans. Once you have cleared the high-interest debt, move to the next high-interest debt on your list.
2. Debt Snowball
The debt snowball method is the inverse of debt avalanche. Popularized by personal finance personality; Dave Ramsey, debt snowball works by prioritizing the smallest amount of debt first followed by the next highest amount, and so on. Experts believe that by clearing one small debt, you build momentum and gain a sense of accomplishment.
3. Debt Consolidation
Debt consolidation involves merging multiple high-interest debts into a single, lower interest payment. Consolidating debt has psychological benefits because it relieves the headache of juggling multiple debts every month. The ideal consolidation option is one with a 0 percent interest balance transfer. While there is usually a fee charged to consolidate debts, it is added to the total debt and paid off over time. Debt consolidation is done through financial institutions such as banks and credit unions, where they assess your candidacy for this service. Now, there are considerations to keep in mind:
• The interest rate must be lower than that of the debt being consolidated
• The loan repayment time should be less or equal to the term of the previous loans. However, this is not always the case.
• Your financial situation should be such that you can afford the consolidated debt without incurring additional debt
• It is not advisable to turn unsecured debt into secured debt unless in special circumstances
4. Debt Tsunami
Debt tsunami is a term coined by Man vs. Debt founder Adam Baker. However, the concept of Debt tsunami is one that you may be familiar with. As Adam defines it, “Debt tsunami is a debt reduction method in which you pay off your debts in order of their emotional impact”.
According to a survey conducted on 2,300 high-debt student loan borrowers by American student loan experts Student Loan Planner, “One in every fourteen respondents experienced suicidal ideation at some point during their repayment journey.” Further, “53% of high -debt student loan borrowers have experienced depression because of their debt.” Therefore, it would make sense to deal with loans with a higher emotional impact first.
5. Debt Snowflake Method
The idea behind the snowflake method is to make small, seemingly negligible payments towards your debt. Just like real snowflakes, when enough of it gathers, it can turn into a sizable snowball. These small cash windfalls could range from an extra 50 Ksh. saved from your monthly grocery shopping or an unexpected 20 Ksh. found in your coat pocket. It does not matter where you find it or how small it is; accumulate it and use it to pay off your debt.
By: Evelyne Kibe
