Debt is inevitable but budget properly first

Personal finance covers a wide variety of money topics including budgeting, expenses, debt, saving, retirement and insurance, amongst others. Understanding how each of these topics work together and affect each other is important for laying the groundwork for a solid financial foundation for you and your family.

At the very basic level of personal finance you are dealing with a budget; you make money and then you spend that money. Even if you haven’t created a detailed and written budget you continue to budget on a daily basis. When you are faced with spending money on something you obviously will have forgone spending that same money on something else.

The problem that stems from not having a detailed budget is that we are faced with so many financial decisions – it is nearly impossible to keep track of and remember everything. When you create a budget you begin to see a clear picture of how much money you have, what you spend it on and how much, if any is left over. Once you can see the inflows and outflows of your money you can optimize your spending so that necessary items are sure to be covered while cutting back on wasteful spending that will allow you to save money.

After you have created a budget you can begin to see where expenses may need to be reduced in order to meet your goals. For some people this means eating less meat and for others it could mean getting rid of that extra car. Whatever the case may be, everyone has an area or two where money can be saved by reducing on some basic expenses.

However, even after creating a sound budget and cutting unnecessary expenses you may still find yourself with a resource gap – this can sometimes be inevitable for most of us Malawians. So you have to borrow some money to cover the gap —but only after making careful reflection on the necessity of the debt and how you will repay it. While attending a Debt Crisis workshop organised by the Bunda College Economics Association (BEA) in 2000, I remember the then former governor of the Central Bank, Dr. Elias Ngalande pointing out that borrowing by itself is not bad but it is the use to which the debt is put that matters more: whether it is spent on some productive investment or just consumed.

When you borrow money to purchase a piece of land or house, you are taking on a lot of debt. But purchase of an asset that can increase in value is a productive form of debt. On the other hand when you go to the Gateway Shopping Mall and treat yourself to a shopping spree using a loan with a 40 percent annual interest rate, then your financial management brains need to be cropped-out especially if you have no sure means of paying back.

As a tip, the first thing to do when you find yourself in debt is to pay more than the minimum monthly payment. If you only pay the minimum each month it will often take decades to repay the debt and cost quite a fortune in interest payments. Once you are paying more than the minimum you should in future look to debts with lower interest rates. High interest rates will make getting out from under the debt even more difficult.

Blessed week-end to you and yours as you plan your budget and how to responsibly feel the budget shortfall. n

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