- December 12, 2018
Many Barbadians are living from pay cheque to pay cheque or "from hand to mouth" as the expression goes. One of the primary culprits for this is consumer debt. The 2017 Financial Stability Report indicated that household debt stood at $6 billion, accounting for around 64% of GDP at the end of December 2017. In fact, Barbadians accumulated a massive $347 million in credit card debt by the end of 2017 and while that credit card debt represented only 5.8% of total loans, it’s important to note that 93% was reportedly owed by individuals and households. This is indicative of the all too familiar scenario of an inability to pay our credit card balances on time; which results in having to make high interest rate payments and in turn contributes to a greater level of indebtedness.
Often times, this is further compounded by the fact that many of us also face long-term debt such as a mortgage which may not be paid off by the time we near retirement. For those between the ages of 51 to 64, debt can weigh heavy on the mind, and for good reason. While being in debt is never fun at any age, being in debt when you're near retirement is one of the worst scenarios. On top of having a limited time to continue earning an income, you could also lose your job and not be able to find another one as easily, or be forced into early retirement due to health issues.
The sooner you clear your debt and take control of your money, the better in terms of retirement planning. For many Barbadians, the first question about a pension plan is “where do I find the money to start?” The following guidelines give direction for debt management and starting to plan for retirement. By the end you will be able to determine your debt to income ratio and have actionable steps to start saving more money.
Review Debt Obligations
The first step is reviewing your personal debt and being smart about using credit cards. For example, if you use a credit card with an 18% interest rate and you do not pay off the balance within a year, you have effectively added 18% to the cost of your purchase. Ask yourself, is it still a good deal? Can you still afford it? Most people have locked themselves into a cycle of borrowing for consumption and significant portions of their salaries are dedicated to servicing high interest consumer loans. Be wary of overusing credit cards and consumer debt in general. If you must use credit, it is in your best interest to pay off the loan as soon as possible to avoid the high interest cost. Reducing your consumer and credit card debt is one of the smartest things you can do towards investing for retirement.
Essentially investing for retirement and paying off your debts do not have to be treated as mutually exclusive events. Make a plan to use part of your savings to reduce expensive debt first, and then you can really start investing. Steps can also be taken to have money invested automatically from your pay cheque before you spend it.
Reducing your Expenses
After you have listed your expenses and tracked them for a while, look for ways that you can reduce them. If you could reduce your expenses by 5% or 10% per month and redirect that spending into an investment plan, the accumulated benefits would surprise you. Expenses can be reduced by making wise and informed spending decisions. Getting a handle on your spending is a fundamental task no matter how daunting it may seem. It entails sacrificing and spending less now so that you can free up money for future, more important goals.
Managing your expenses depends on clearly identifying and distinguishing what is a necessity and what you can do without; differentiating between needs and wants. Ask yourself, do you really need that shopping trip to Miami or to spend over $500 on Christmas gifts? Be sure to set a monthly budget and stick to it, while also tracking your expenditure. You could be well on your way to financial security simply by eliminating wasteful expenditures and then moving the money saved to an automatic investment program.
Debt Elimination Plan
Break the credit card habit! Remember that it is much easier to get into debt than to get out of it. Carrying a credit card balance every year causes you to throw away hundreds of dollars on high interest payments annually. Given that credit cards are one of the most expensive ways to borrow, try to pay all charges in full when you get your statement and avoid paying late charges that can substantially add to your purchase costs.
Make a list of all money owed in descending order, with the highest interest rate debt at the top. Decide the largest amount you can afford to pay each month and start at the top of the list until it is all paid. If you own your own home, consider a home equity loan for debt consolidation to lower the interest cost. Additionally, try to make an extra payment towards your principal balance to speed up the repayment of your loan and reduce interest cost.
Debt-To-Income Ratio
The debt to income ratio is the percentage of your monthly income that is consumed by monthly debt payments. This is a very useful gauge for measuring your financial health. Simply total up all your payments made to credit card debt, consumer loans and your mortgage payments and divide this total by your monthly income.
If you find yourself in the high to danger mark, do not panic. Remember financial insecurity does not have to be an accepted way of life. The key to starting on the road to financial security and retirement planning is to live within your means - to be able to effectively distinguish between what you actually need and what you merely want. Make an appointment with a RF Retirement Specialist so they can tailor a plan to assist getting you out of debt and towards a financially stable retirement.
