Dangerous spending spree
By Philip Deetlefs
Readers can contact him at (061) 222360 or via e-mail at deetlefs@mweb.com.na .

I read the other day that personal debt in America has now reached a level where the people owe more than what they own. This means that America is theoretically bankrupt. I also read the other day that we, in Namibia, are also on a spending spree that has become a concern to economists. Economists reckon we are spending too much on non-capital items. In other words, we buy items that are consumed and thus become worthless and cannot be counted as an asset.

The underlying problem of this debt corner which it seems a huge part of the world has painted itself into, is that we are not saving enough. How much a population saves is an important statistic that indicates the economical health of a nation. The more we save, the merrier. From that point of view, the world, including Namibia, seems not to be a very merry place to live in currently. Debt can be financed in two ways. On the one hand you get short term debt and on the other hand you get long term debt. This in itself, if misused, becomes a very risky affair. The “law” of financial planning dictates that one makes a clear distinction between what items should be financed over the short term and the other way round and act strictly accordingly.

Items that are financed over the short term are for instance an overdraft, the purchase of personal effects which are often paid by credit card and even a motor vehicle.
Capital items are usually financed by long term debt over 20 years for example, like a house. A home loan is one of the cheapest forms of financing short term debt on the condition that you treat your short term debt that you finance with a home loan as short term debt. If not, it becomes a very expensive and rather stupid way of paying debt. By this I mean that if you finance a car transaction through your home loan, you are in effect borrowing money from your house to buy a car. The only reason one takes this route is to make use of the much lower interest rate usually attached to a home loan. Your monthly repayment should be the same as if you had financed the car with a normal hire purchase. The way you benefit is that you will have repaid the car over a much shorter period as opposed to repaying a hire purchase loan.

The solution to the national debt problem is that we should save more. The next thing you may say is that we don’t have enough money to start with a savings plan. This may be true in many cases, but a huge number of people will be astonished to discover how much money they have available to save if they are honest about the necessity of many of the goods they buy. I know also that many people nurse their stress levels with so called retail therapy. I have also heard that retail therapy only works if you buy something that you absolutely do not need. If this is true we should perhaps spend a few dollars on a couple of visits to a psychiatrist to nurse our stress levels back to sea level?

A better cure for high stress levels is to start with a savings plan. The issue of saving money is not about how much you save, but rather that you start saving money. Very soon you will discover how much it benefits your stress levels and you will want to increase your monthly savings because suddenly you feel fine. Just do it!