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Dealing With Debt – Part 2

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Wednesday, February 07, 2018 09.17AM / Skye Pearl / Olajumoke Caxton-Martins

A thousand and one thoughts flashed through Latifah’s mind. A courier service had just delivered a lean parcel to her. She had started wondering what it could be. The light weight of the parcel suggested that it was a letter or a one paged invoice or receipt. However, she could not guess as she was not expecting correspondence from anyone in the electronic world of today. Anyone who wanted to communicate with her would send an email or an instant message, except of course her dreams had come true…
 

She had desired a change of job for a while and she had applied to several companies. She had even gone beyond the application stage with some and attended interviews. This could be it, she mused; the much awaited Appointment Letter. At least, she had never heard of a rejection letter being mailed to any job applicant before…
 

She couldn’t wait to find out which of the firms had its head screwed on so right that it had decided to offer her a position. Why wait to open the letter to find out? She decided to read the sender portion of the polythene courier service wrap. Horizon Microfinance Bank. The name did not ring a bell, neither did it put on any light bulbs. She had not even applied to any Bank, not to talk of a microfinance bank. Well, enough dilly dallying. She had to find out what laid within.
 

Dear Latifah Usman,
 

DEMAND FOR SETTLEMENT OF OUTSTANDING INDEBTEDNESS
 

We write in respect of the loan of N800,000.00 availed to Mr Azeez Mustapha guaranteed by your good self.
 

Please note that Mr Azeez Mustapha has failed, refused and/or neglected to make the requisite payments on the instalments of his loan. Several entreaties were made to him and he has started evading our officers and he is nowhere to be found at the moment. In view of this, his loan has become due for repayment and we have made the requisite demand on him to no avail.

We hereby implore you to make all necessary arrangements to fully liquidate his indebtedness, which stands at N717,065.08 as at today, within the next 7 days, failing which we would have no option than to recover the sum from you by every means available including presentation of the post-dated cheques you submitted to us.

We look forward to your prompt response.
 

Thank you.
 

Yours faithfully,
For: Horizon Microfinance Bank Limited 

The content of the letter knocked the wind out of her sails. Azeez was a former colleague who had since left their company. She had filled the guarantee form so as not to seem “somehow”, after all, it was no big deal. They had lost all contact since his resignation 2months ago. How would she get him? Another’s debt has now become hers to pay…
 

Money problems, especially debt, could be for many reasons – a lifestyle you can’t afford, extravagance, poor spending decisions, keeping up with the Joneses, giving too much (yes, it is possible, I am a case in point) or simply not earning enough. Whatever the reason, the good news is that things don’t have to stay that way. This has come at this time to help you ensure that your personal finances take a turn for the better in 2018.
 

So, here are 8 steps to help you tackle that debt problem for good. I hope they help you, like they have helped me.
 
 

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STEP ONE: Recognize that there is a problem.
There is no point behaving like the proverbial ostrich that buries its head in sand when it senses an impending attack by a predator. Refusing to think or talk about your debts or repayments that are about to fall due, and that you do not have a means of meeting, will not help you. What you need to do is acknowledge that there is a debt problem (be it debt creation or debt repayment) and then confront it headlong with a decision to end it. Getting out of debt is hard work and the truth is that it never happens by chance. Haven’t you ever received excess money and still refused to pay back a loan because it was not due yet? This shows that getting and staying out of debt requires a conscious decision to do so. Make that decision today. 

STEP TWO: List all your debts.
Who are the people you owe? How much do you owe them? Do the loans attract interest? If they do, what are the interest rates? What is the minimum you are permitted to pay on each loan per time? How often does payment fall due: weekly, monthly or quarterly? When making this list, ensure you capture all the people you owe. Everyone. What you owe family members and friends should not be left out; especially if those people are not demanding repayment. If you asked for a loan when collecting the money, treat it as a debt. Write it all down. This would afford you a proper perspective of your debt portfolio, and would in turn enable you devise an action plan for getting rid of all of the debts. 

STEP THREE: Prioritize your debts.
Arrange your debts in their order of priority. By order of priority, this would mean that you should arrange them in the order in which you want to pay them. While some would advise that you get rid of the small debts first, since the feeling of victory you get when you do that would give the needed impetus to tackle the next in size, I would advise that you pay the high interest debts first. Understand the rationale behind it – the debt with the higher interest costs you more in the long run. 

Why not take it out and leave the small ones that remain the same amount over time or would only slightly increase with a delay in repayment? In prioritizing your debts, please bear in mind the cardinal rule that the most important debts to repay are the ones where there are serious consequences when you don’t pay on the due date. The more serious the consequence, the more urgent the need to pay. Let me mention here that you must ensure that you rank postdated cheques issued as urgent debts. Issuance of dud cheques is a criminal offence in Nigeria with a dire penalty.
  

STEP FOUR: Create a budget.
(i) Track your income and expenses. With this, you can determine how much money comes in and what it is being spent on. When you know this, you would then be able to create a plan for the way the next expected income would be spent. Telling your money where you want it to go before it arrives is the underlying motive for having a budget. 

(ii) Screen your regular expenses: Maintain the basic necessities and scrap the things that are merely desirable, at least until your debt is under control and you have money to spare. Cut out things that you can do without. It would be nice to get a second opinion on your basic necessity list too. An accountability partner would be quick to tell you that Mayonnaise isn’t necessary when butter is already on the list. Be innovative with substitutes. For example, a good matching pair of silver and gold sandals and purse would easily replace all hues of shoes and bags required for the parties for a long time.
 

(iii) Determine how much you need to spend on your basic necessities and set very strict spending limits for them. Draw up a budget and keep to it. Make up your mind to live within your means after apportioning your income. It is not worth the stress and regret associated with not doing so. If you don’t have a budget, that is if you have not decided what you want to do with your money before it arrives, it is really hard to be disciplined.
 

This is because there are no guidelines to follow, indicating how much you should save, spend and use to repay debts. A budget would allow you to ensure you have money for what’s most important to you while servicing your debts and saving for the future at the same time. At this point, if you didn’t read it before, you should take a look at my past articles on savings.
 

STEP FIVE: Pay down your debt.
There are basically two approaches to tackling debt. The first, which I mentioned earlier, is to paying off debts in order of size from the smallest to the largest. When debts are catered for in a budget, once one debt, which was being serviced, is paid off in full, the money set aside for it is added to the other funds apportioned for debt repayment, which would increase the funds available to service the next in size and thus reduce its lifespan as well. This process is continued until all debts are satisfied. The driving force of this approach is that progress in tackling debt is easy to observe and being free from one creditor after another grants exhilaration and relief, which fuels the tackling of the next debt. 

The second approach was also mentioned earlier – paying the debt with the highest interest rate first. This approach saves you the most in interest charges and therefore future income. No matter your approach, you need to be both patient and persistent.
 

Please note that no matter your approach, minimum repayments for all debts should be observed from all available income. Whatever happens, you need to ensure that you continue to pay down the debts, no matter how small the amount you’re able to pay. The fact that you’re paying is all your creditor needs to assure him/her that you will honour the agreement, even though it’s happening slowly.
 

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