The Debt Trap

You’ve probably met some of the characters in this story. He’s the well dressed chap in the sleek suit, driving the latest sports car, living in the uptown area of what you can only describe as suburban bliss. They’re the happily married couple that live opposite you – you know the ones with the fancy cars? When the new year greets you with added responsibility: higher school fees,  loan repayments have hit the roof and that bonus your boss promised you is still yet to materialize –  your neighbors soar into the new year with a brand new S-Class Benz.

Let’s go behind the scenes and find out what’s really happening.

Mr. sleek suit earns 100k a month but has loans worth over KES 3m with monthly payments of 70k – 90k, so he gets by using his credit cards and overdraft facility. Mr. and Mrs. happily married are also deep in debt but have learnt to depend on borrowed funds from friends, family and employers to keep up with their extravagant lifestyle. Their lives are unsustainable and it’s only a matter of time before these characters will have to file for bankruptcy.

Let’s bust the first myth: Being successful means I have a fancy car, live in a fancy house and wear fancy clothes.
True financial success is when your investments are generating enough income to meet your daily needs and you no longer need to work for a living. This is financial freedom.

The second myth: Well, at least I own a house and a car – so I have investments.
A house that you live in is not an asset but a liability, an asset is an investment that gives you a return on your money. Your house will become an investment if you choose to rent it out.  A car that you use is also a liability. It does not generate income but is a cost to you, more so if the car is on loan. This doesn’t mean that you shouldn’t own a house or a car, it just means that if you want to own these items you may have to forfeit investing for a while which will take you back in achieving financial freedom.

Third myth: I know I’m sitting on a lot of debt right now but I’m climbing up the ladder, my pay will go up and I’ll settle my debts.

That’s OK but why wait? Perhaps when you get that pay increase you may be more inclined to upgrade your house or car, perhaps the increase will come the same time you’re expecting twins so your costs go up. Now, is the time to act. Cut down on your spending, we can live on much less than we think – and it’s only temporary. Delayed gratification is not always easy but think about how much lighter you’ll feel with that debt off your shoulders.

Debt isn’t always a bad thing. Many companies and investors have grown their wealth and companies by taking on debt to fund their investments. Bottom line – let debt work for you and not the other way around.

Story By: Doreen Zaki

From Revuka Capital; (An investment agency linking investors and investment opportunities in the market).