In week 5, we encouraged you to make saving easy by setting up direct deposits to your savings account.

The next step in the 12 Week Check-Up is to review your debt. As you may have noticed, getting into debt is easy. There is always the temptation to spend money and there are credit card companies and banks that are always willing to loan you their money (of course for a hefty fee in return).  

Few people are living debt-free. For most people, living with debt is a way of life. Living with debt is not necessarily negative. Sometimes people have to acquire good debt for important things in life. Investopedia defines good debt as debt that “helps you generate income”. In the BVI, land is a valuable commodity that usually increases in value over time. Taking out a loan for land may be considered good debt because, over time, the value of the land would be worth more than the loan taken out to pay for it. Business loans and educational loans are also other examples of good debts.  

If good debt helps you earn money, bad debt causes you to lose money.  With bad debt, you end up paying the money you borrowed from the lender, plus interest, for items that begin to lose value the minute you purchase them. Some examples of bad debt include car loans and credit card debt if not paid in full at the end of the month.

When it comes to debt, you should aim to take on good debt. You should also diligently manage that debt and work towards paying off that debt as quickly as possible.

Managing Your Debt

What types of good debt and bad debt do you have? Do you know the exact amount of money you owe on your debts (including interest)? What are your interest rates? How much of your income goes towards paying off your debt? Are you behind on any payments?

Calculate all the necessary figures to get a good picture of where you currently stand when it comes to managing your debt. If you are behind on your payments, you may need to consider finding additional income (i.e. another job) to get extra money to catch up on your payments. You may also wish to talk with your lender to find out if there are ways to reworking your payment plan to help you better manage your money.

Paying off your debt

Even though it is necessary to incur debt (good debt) at times, your ultimate goal should be to pay it off your debt as fast as you can. The longer you take to pay off your debts, the more money you lose in the long run paying interest. Find ways to pay off your debt quickly. You may wish to direct any additional money that you have towards your debt, making extra payments when you can. You may also wish to talk with your lenders to find ways to pay off your debt faster.

Your Prescription for Week 6

• Take some time to determine how much money you really owe (this should include the interest that is expected to be incurred).  
• Determine if you are up to date with all of your payments. If not, find ways to get on track.
• Talk with your lender to find ways to better manage your debt and/or find ways to pay off your debt faster.
• Make a plan for paying off your debts (follow Money Matters BVI on Facebook to get some ideas about how you can plan to pay off your debt).

Next week we examine your risk management strategies.