Lost Your Income? Avoid This Mistake…
Data from the Kenya National Bureau of Statistics (KNBS) shows that about 1.72 million workers lost jobs in three months to June (between April and June) when Kenya imposed corona virus induced lockdown that led to layoffs and pay cuts.
When one loses their income, so that their ability to service their loan is challenged, the natural reaction is to take one’s benefits or proceeds from sale of business assets to pay off loans. Don’t! You will get yourself into financial bondage! This lump sum is the only available amount that you can work with at least until you get your incomes back. You want to be sure that the amount that you have can sustain you for an extended period of time. We will come back to this.
Before you come to terms with loss of income – closure of business, loss of job, dealing with pay cuts – emotions are high and chances of making errors in judgement are heightened. So, first things first, get yourself into the right frame of mind, the right mind set.
- Accept the circumstances – If you have lost a job or are having to survive on a fraction of your salary, understand where your employer is coming from. The pandemic has adversely affected many businesses making meeting operational costs difficult. Business owners know this first-hand. Avoid any blame games and adjust accordingly.
- Communicate with relevant people – Let the people ‘who matter’ know that you are going through a situation of reduced pay. They will borrow less and hopefully they will now support you (payback time). For the married people or for those who make money decisions with another, have them involved for support and in deciding how to handle household bills.
- Practise gratitude – Different people have been affected in different ways. If you look around, you will realize that some people are in worse positions than you find yourself in. Be grateful for your better state. This will help you appreciate your position, have some positivity for the future and even be in a position to help.
How then should you get off debt?
Once in the right state of mind, device a debt reduction strategy that will enable you settle your debts without bringing the rest of your financial life to a complete halt.
How?
Begin by listing all your debt (big and small), giving as much detail as possible – the amount you owe, the interest rate, the minimum payment, etc. – to come to terms with the magnitude of debt. Decide how much you can afford to progressively pay for each loan (minimum amount). Having a budget can help you decide on this.
Decide which debts to pay off first. Choose a method that will help you stick to your commitment. The high interest method is best if saving money that would otherwise have settled interest expense is most important to you. In this case, you would be keen on paying off your highest interest bearing debts first. However, if paying off a large debt for a long period of time would demotivate you, begin by paying off the smallest debt first. Don’t underestimate the value of this psychologically; if seeing your debts fall one after another keeps you motivated, it’s worth paying a little extra interest.
Once you have picked your method of choice, it is typically best to make as much payment as possible to your first debt while paying the minimum to all the other accounts. Depending on your circumstances, choose how much you are comfortable to pay towards the debt you choose to attack first. NB: You may retain all debt at minimum repayments depending on your level of strain. Once you have paid off one debt, add the amount you have been paying to the minimum payment of the next debt on your list. Tip: Get extra cash to help you settle the loan you are focusing on faster. Where do you get the extra cash? Find a hustle. Sell stuff you don’t need. Collect a debt owed. And do you need all those extra TV channels?
Meanwhile, do not accumulate further debt. Eliminate privileges like eating out and be deliberate in only meeting essential needs. Live frugally until you can get out of deep debt and have your finances in order. With a plan and monthly payment amount now in place, maintain consistent payments. You will settle your debt in remarkable time without depriving yourself of essential needs.
That said, there is good and bad debt. Good use of debt is spending it to acquire assets that generate some income. Bad debt refers to debt that is used for consumption purposes, for example furniture loans. You do not have to be 100% debt free. You may leave a manageable debt amount by paying off all the bad debt and part of good debt. Use the freed up monies as capital to generate some income for you.
You have what it takes!
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