Home' Trinidad and Tobago Guardian : July 27th 2014 Contents At any stage in life, this four-
letter word called "debt" can
be a source of great distress
and anxiety and can wreak
havoc on people's lives. Sim-
ply put, debt is a financial
obligation or commitment owed to others.
Many individuals use debt as a method for
making large purchases that they could not
afford under normal circumstances. A debt
arrangement gives the borrowing party per-
mission to borrow money under the condition
that it is to be paid back at a later date, usually
Inconspicuous in meaning, debt can have
a profound negative or positive impact on our
lives. For many people, debt is something that
creeps up on us, building slowly over time.
Your debt may have grown from being small
and manageable into something that now feels
like it's totally out of your control, but now
you need to accept that your debt is a problem.
Struggling with debt is one of life's most
stressful experiences, however by managing
personal debt, many of the pitfalls associated
with debt can be eliminated
So what are the debt danger signals? You
continually go over your spending limit or you
use your credit cards as a necessity rather than
a convenience; you are always borrowing
money to make it from one payday to the
next; your wages have been garnisheed to pay
for outstanding debts; you pay only interest
or service charges monthly and do not reduce
your total debt over many months or creditors
pressure you for payment, threaten to hire a
collection agency to recover the money for
It is important to understand that incurring
personal debt is not inherently wrong. In fact,
debt can be incurred for good reasons as well
as bad. In general, good debt will have a high
probability of creating future economic value
for the individual with a low probability of
impairing his short-term financial condition.
In short, good debt creates valuable or pro-
ductive personal assets without placing exces-
sive strain on an individual's income.
Mortgages and student loans are examples
of good personal debt to the extent that the
loan payments can be realistically serviced
from the individual's current or future earnings.
Bad debt, however, is debt that is unlikely
to yield any future economic value to an indi-
vidual and/or that is likely to contribute to
worsening his financial condition.
Incurring debt in order to finance non-pro-
ductive assets (a big-screen TV, for instance)
or discretionary expenditure is a sure-fire sign
of poor financial planning. This is usually
exemplified by retail use of credit cards or by
hire purchase acquisitions of some household
Even the acquisition of productive assets (a
student loan, for example) via debt can prove
to be damaging to the individual when the
loan payments cannot be realistically serviced
from the individual's expected earnings.
Understanding what differentiates good debt
from bad debt is of critical importance in mak-
ing one's financial plans.
The fallout from impulsive decision making
on personal debt can be very painful and can
endure for many years. Consequently, the
decision to incur new debt must be critically
evaluated at every juncture of your life.
If you currently have a debt problem or if
you are committed to maintaining a healthy
financial condition, the following debt man-
agement guidelines may prove helpful.
How much do you owe?
In order to manage debt you must first know
what you owe and to whom it is owed. A sim-
ple list that itemises how much each creditor
is owed and their corresponding interest rate
is usually the first step toward lightening your
With the list competed, one should target
the repayment of the debt with the highest
interest rate first. More often than not, this
is the credit card debt. In working toward pay-
ing off credit card debt you should avoid falling
into the minimum payment trap. Minimum
payments might be low but they extend the
term of the outstanding credit and, ultimately,
cause you to pay much more interest. Addi-
tionally, some loan agreements carry variable
interest rates which can change periodically.
It is advisable to be vigilant to find out when
and by how much interest rates change.
Accelerate debt reduction
It is possible to accelerate debt reduction
by prepaying installments. However, when you
make a prepayment on some type of debt
(that is, pay more than what is immediately
due), you should ensure that the extra payment
goes to the principal only. This serves to reduce
the total amount owed as well as lowering
interest that will accrue going forward.
Making prepayments wherever possible is
generally advised, since in most cases speeding
up the debt repayment period usually leads
to less overall interest payments over time. As
soon as you have paid your first debt off, you
get to work on the next debt and continue
until you have cleared them all. Psychologically,
it can be rewarding to see your creditors
become fewer and fewer.
Negotiate with creditors
Depending on the nature of debt and con-
dition of the debtor, it is worthwhile to consider
re-negotiating terms with creditors. You may
argue for a refinancing of credit card debt,
having the interest rates reduced or repayment
Each of these can bring some short-term
relief to your debt burden. Renegotiation is a
useful strategy particularly in periods of falling
interest rates. If you've been a good customer
in the past, the lending party may extend some
goodwill toward your situation.
However, you need to be wary of fees asso-
ciated with debt restructuring as these may
cancel off the benefits of the renegotiated
Ultimately, the best way to manage debt is
to avoid it. If you want to get your debt under
control, start by figuring out your spending
patterns and identifying unnecessary expenses.
Only through budgeting can an individual have
a firm understanding of his or her sources of
funds and take control of their financial sit-
For many people, reining in discretionary
spending for a few months goes a long way
toward tackling debt. If you saddled with debt
problems, then doing a budget is central. You
have to get a handle on what you spend to
future-proof your finances.
Starting a budget could mean simply allo-
cating your income between savings and dif-
ferent categories of expenditure. One should
keep a record of all spending so that the accu-
racy of your budgeting can improve over time.
Try to set aside some of your salary each
month so you have an emergency fund to fall
back on should something unexpected happen
in the future.
Establishing and sticking to a budget leads
to financial discipline as well as a more prudent
assessment of needs versus wants; and
enhanced savings, which is the bedrock upon
which long term wealth and peace of mind is
Don't let debt paralyse you because it is
going to rob you of your financial freedom.
Remember that the more concrete actions you
take toward getting out of debt, it will also
have the result of eliminating the fear and
stress that come along with it.
Financial planning for life events is a
critical aspect of saving and investing. The
Unit Trust Corporation has a wide array
of products and services to assist in achiev-
ing your financial goals. Log on to
www.ttutc.com for more information.
Do you have any questions or comments
about this column?
Are there any topics that would like cov-
ered? E-mail us at email@example.com
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt JULY 27 • 2014
Unit Trust Corporation
Don't fall prey to debt
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