Debts don't just disappear on their own; I'm sure you know that.
Some debt is good. If you borrowed to invest in a business or a property then hopefully your return on investment will more than replace the borrowed funds.
If you borrowed to buy clothes and other wasting chattels - possessions that start to fall in value the moment you purchase them - you need to get rid of that debt fast. This unnecessary burden will hold you back from progress.
This is the strategy I recommend:
1. Don't borrow any more money until you have paid back all current loans.
This is hopefully an easy commitment to make.
2. List your debts
Fruit Seller - MWK2,000
Uncle James - MWK5,000
Suits for Work - MWK30,000
Handbag Seller - MWK8,000
Total debts: MWK45,000
3. Decide what percentage of your salary you can afford to dedicate to repaying borrowed money. This should be 10% of your salary or more if you can afford it. For example:
I assume that your monthly salary after tax is MWK80,000.
As you will remember from last week's article, MWK8,000 (10%) has to immediately be placed in your Look But Don't Touch (LBDT) account. Leaving MWK72,000.
If you can commit 15% of your monthly salary to debt repayment that is MWK12,000 that you have to set aside.
4. Visit each creditor on your list and explain how much you will repay them every month. Each person should ideally be repaid on a pro-rata basis. However, the fruit seller should be repaid in one go. MWK2,000 is very significant to her.
What do I mean by repaying on a pro-rata basis?
Pro-rata repayments are based on the percentage of your debt owed to each party: 11.6% of your debts are to your uncle, 70% to the suit seller and 18.4% to the handbag seller.
So, in the first month your MWK12,000 repays the following amounts:
In the second month your MWK12,000 repays the following amounts:
You pay these amounts until each debt is fully cleared. Given this level of debt and a commitment to repay debts using only 15% of your salary, you would be debt free in four months, assuming no interest is being charged.
It is important you tell every debtor exactly what your repayment formula is and how many other people you are repaying so that they don't chase you for payment. If you make your repayments on time and without a reminder you will gain the trust of your creditors.
What if a creditor requests to be paid back first because he has an obligation? You'll need to explain that you simply can't afford to do that. They either agree to the repayment schedule or get nothing back!
From the 5th month onwards you would have an extra MWK12,000 that is all yours. You would be debt free, stress free and well on your way to financial freedom. If your debt burden is larger it will take many more months but you will eventually clear it.
"If your outgoings exceed your income, then your upkeep will be your downfall." Bill Earle
For 2 years until early 2014 I wrote a weekly personal finance and business column for Malawi's leading media house, The Times Group. The target is middle-class, working African women.
This is a reproduction of the articles that appeared in the weekend edition of Malawi News.
|Heather Katsonga-Woodward: On Business, Life & Everything In-Between||
On Managing Money