Get Rid of Bad Debt
Get Rid of Bad Debt
With less than a month to go before the New Year we continue last week's theme how do we get in good financial shape for 2011 and what tips should we follow to help us get there? A week ago we talked about the importance of budgeting. This week we ask what is more important to save or to clear debts?
As with most things in life it is best to start with a full and realistic audit of your financial position. Most of us find that our debt position is uncomfortable but, absent an honest appraisal, we are reluctant to admit it. We have good jobs, good tax free salaries here and Dubai is well into a turn around from the low point of last year. Everything is rosy, debt provides a short cut to things we need and there will be no problem in supporting it.
But unless debt is contained we can find it spiralling out of control and unless debt is contained we can't even begin to think of saving and saving is ultimately what we must all do to provide for our future.
So what level of debt can we handle and what is good and bad debt? As a very coarse rule of thumb no more than a third of our monthly income should go to supporting debt repayments (both capital and interest) and much less if you do not have a home mortgage. The remaining two thirds are there to cover monthly running costs, hobbies, interests and entertainment and indeed a savings discipline. This ensures that you build the right pot of money to cater to significant future expenses such as school fees and ultimately to provide for your retirement.
Today in the West we are experiencing a most unusual phenomenon and one which is destined to last only a few more years. Mortgage financing for personal properties, assuming you can get it, is at an all time low. With real interest rates at under 3% it can actually make sense to take on this debt. You will get a better return keeping this in place and using excess monies for saving rather than paying the mortgage off. However beware. This attractive low rate home borrowing regime will not last for ever. As world economies regain their confidence and inflation returns to the system so will bank base rates rise and home financing return to levels which may see more than a third of your income each month servicing your total debt position. But for the moment enjoy the day.
The worst form of debt, whatever the state of world economies, is credit card debt. What we all have to understand is that the credit card companies and the banks that support them can only provide us with this wonderful plastic money facility by levying huge interest charges. Sure it's wonderful to go shopping and present a card with little thought to cash in hand or money in the bank but at the end of each month in addition to payment for the goods and services you acquired there is likely to be a hefty interest charge.
The banks here aggressively market their cards. It is estimated that 80% of the residents of the UAE have at least one card and of course many of us have a number of cards. The danger is that we fail to clear the outstanding card debts at the end of each month because the banks very cleverly permit us to pay off only a small amount of the total. Two consequences flow from this. First and almost without us realizing the debt grows and grows until it becomes unsustainable. Second, the interest payment increasingly becomes a larger part of the overall debt. When you pay interest rates in the teens the cumulative and disproportionate growth of the interest debt is frightening.
We know of instances where interest rates of 30% a year have been charged. In such instances you will in 3 years pay back the amount you borrowed twice over! No wonder the banks love cards.
Interest on money lent (or usury) has been frowned upon by all ancient philosophies and religions and, as we can see, for very good reason. In Islam it is forbidden and many would say rightly so. If your financial audit shows that your credit card debt is getting out of control then the first thing you must do as you plan your 2011 finances is to clear that debt. Once you have achieved that make sure you clear all your credit cards at the end of each month. What is the point of investing $500 a moth in a savings plan to make 10% growth if you are paying 30% on a credit card!
Check out all your borrowing noting the interest rates you are paying ask an independent financial adviser if they can get better terms from a different lending source on your medium and long term borrowing such as your mortgage and get rid of short term expensive debt.
Clearing debt has the added benefit of a sense of freedom as long as you are in debt the institution you are in debt to has control over you. In the UAE there can be serious repercussions for those who fail to meet their creditor commitments including being put in debtors jail a practice abolished in the USA in 1833. Beware particularly the scourge of post dated cheques. Unless you keep close tabs on due dates you may find your creditor bank or landlord for example cashes this even knowing the cheques could be dishonoured.
Next week we will look at getting started in investing establishing emergency, short, and long-term plans, and selecting the right investment mix.
Contact Holborn Assets to speak with one of our UK qualified consultants today.
Why An Individual Voluntary Arrangement Is A Smarter Way Of Fighting Debt Understanding the Psychological Effects of Debts Common Drawbacks in Eliminating Debt Eliminate Unsecured Debts - Ways to Get Out Of Debt Easily and Quickly What To Do If You Have Too Much Debt Anti Aging Skin Cream... Why Should I Purchase? How Shopping Addiction Leads To Debt Shopping How To Make Unique Purchase. Debt Solution - Financially Attractive Debt Solutions Offered by President Obama Obama's Special Grants to Throw Away Debts of US People Free Grant Money - President Obama Awards Grant Money to Relieve You of Debt The World is Not Enough - Calling for a A lot of Ethical Approach to Personal Finance Consolidating Debts - Several Information to Put Down Financial debt