Oran Hall | Breaking the burden of debt

Commercial bank loans and advances to individuals and households resident in Jamaica for non-business purposes, commercial bank credit card receivables or outstanding balances, and credit union consumer loans show that Jamaicans have a healthy appetite for debt.

Some borrowers, though, are in trouble, not being able to pay faithfully the sums they borrow from these lenders and others such as hire-purchase companies. The real challenge for them is to find a way to break the burden of debt and begin to establish a more stress-free life. Painful as it might be, there are strategies which can help.

Bank of Jamaica data on the following pages – boj.org.jm/statistics/financial-sector/commercial-banks/ and boj.org.jm/financial-sector/credit-unions-data/ – give a glimpse into the level of personal and consumer loans to individuals and households. I have chosen to highlight figures for the end of March 2023 and March 2024.

Commercial bank loans to individuals and households at March 31, 2023 were $580 billion – 49.38 per cent of total loans of more than $1.17 trillion. One year later, the figures were $659.54 billion and $1.31 trillion, respectively, meaning consumers accounted for 50.31 per cent of total loans. Total outstanding credit card balances were $65.76 billion and $73.29 billion, respectively.

With regard to credit union loans, in March 2023, consumer loans of $94.49 billion accounted for 85.4 per cent of total loans of $110.65 billion, but increased to $106.38 billion – 84.6 per cent of total loans of $125.73 billion at March 31, 2024.

If borrowers become more reliable payers, the lending institutions become happier and borrowers become happier and healthier, so it is important for borrowers to be able to repay the money they borrow and improve their prospects of realising myriads of goals for themselves and their families.

The person who borrows is really living today on money expected to be earned in the future, but this is not guaranteed because circumstances can change for reasons such as ill-health and unemployment leading to a loss or reduction of income. The mismanagement of a person’s financial affairs can also limit the ability to repay debt. Additionally, people who have a debt problem because of their impatience, poor attitude to honouring their commitments and carelessness may find it hard to solve the problem.

A critical first step in turning around a debt situation is casting a realistic budget, one that is in line with income, because there cannot be spending without income. What you earn determines what you spend. This applies to the self-employed as much as the employed. In fact, the self-employed has a less certain flow of income and must cast the budget to reflect the expected ebb and flow of income, setting a reasonable spending figure and saving what is earned in excess of it to cover deficits in other periods.

Make debt repayment the priority in the budget during the period of rehabilitation. This is likely to make belt-tightening necessary, so spending priorities will likely change. Focusing on the benefits to be derived from a restoration to financial health should prove useful. Consider how useful money can become when it does not have to go into making interest payments.

An understanding of the various categories of expenses can help in reducing expenses to make the budget balance. There are four major types of expenses: required, discretionary, fixed and variable. Discretionary and variable expenses allow the greatest level of latitude.

Required expenses include the cost of accommodation like rent and mortgage, food and utilities. Rent and mortgage are generally fixed, but rent can be reduced by moving to a cheaper neighbourhood. School fees are also required and generally fixed so there is little latitude. Health care expenses are required but variable, so make provision for them.

Food and utilities are necessary but variable expenses, but, in repair mode, it is critical to manage them well to free up money to reduce the debt.

Discretionary expenses, entertainment, for example, are among the easiest to reduce or eliminate and tend not to seriously affect living standards.

Where there is more than one debt, explore the option of debt consolidation. Not only does it result in one periodic payment, it may result in a smaller periodic payment.

Another option is to list all debts from the largest to the smallest. Make the minimum payment on all debts but make an effort to clear the debt at the bottom of your inverted pyramid first, then follow in ascending order using the money released to add to the payment for the next debt. Alternatively, consider paying the most expensive debt first, and cancel your expensive credit card, particularly if it is at the heart of your troubles.

Where possible, increase income by selling assets especially if they are under-used or are not adding much value to your life. If possible, turn your hobbies into income streams or take a part-time job. Get a better-paying job if you can, but consider it may come with more responsibility.

The process of eliminating debt can be very painful, but the alternative can be more painful. It requires discipline and sacrifice to be effectual.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com