Its the beginning of a new month, and money is in the bank and your feeling flush with cash but before you take that loan,secure that mortgage , make that purchase… read about these common debt traps and how to avoid them below:
BUYING A HOME YOU CANNOT (COMFORTABLY) AFFORD
In general, you should not spend more than 28% of your gross income on housing expenses, and your total debt-to-income ratio (including car payments, credit card bills, student loans, etc.) should not exceed 36% of your gross income.
Next, figure out the maximum down payment you can make. Try to put 20% toward your new home to avoid paying private mortgage insurance. You also need to factor in closing costs, which typically range between 3% and 5% of the home price. Case in point:
You want a home that costs Kshs 5 million; Then you would need to budget at least Kshs 1,000,000(20% deposit) plus Kshs 250,000 (5% closing cost) which would mean to comfortably afford to pay the mortgage for a Kshs 5 million home, you would need to have savings of Kshs 1,250,000 at the very least.
It is also important to account for home-owners insurance and real estate taxes, both of which can alter your debt-to-income ratio dramatically add in money for decorating and any unforeseen emergencies.
Bottom line: If you’re not yet there financially, KEEP SAVING. It’s best to buy a home only when you can truly afford it.
CO-SIGNING A LOAN
Attaching your name to someone else’s debt is tantamount to taking on the debt yourself. If the borrower doesn’t follow through on payments, it is left up to you to foot the bill. And if late fees pile up or there is a default on the loan, your credit rating could be damaged and you might even wind up in court. Worse, if you suddenly find yourself in need of extra money, you could be denied a loan simply because lenders deem that you already have too much debt due to the co-signed loan.
The only sure way to dodge this debt trap is to just say no when asked to co-sign a loan.
MISMANAGING CREDIT CARDS
One wrong turn down the credit path can haunt you for a long time. Start with a late payment, which can result in a higher annual percentage rate. If the payment is more than 30 days late, it will likely damage your credit score, too. Once your score takes a hit, so does your future borrowing potential. Now, as your balance swells each month, it becomes harder for you to pay your bills, which dramatically increases the amount of time it takes you to retire the debt. Further, a damaged credit score makes it difficult to secure new lines of credit, which could force you to charge more on your current card or take out a cash advance. By using up more of your available credit, you could further damage your credit score. That cash advance also comes with a high price: Interest starts accruing from the day you withdraw the money. Now you have dug yourself deeper into debt, trashed your credit score and are left with fewer borrowing options.
Pay in Cash where you can, or Save . If you must use a credit card, MAKE SURE ALL YOUR REPAYMENTS ARE ON TIME
STARTING A MARRIAGE IN DEBT
Money squabbles are a leading cause of divorce, so it makes sense that newly-weds should limit the number of financial obstacles that arise in the early years. It might be hard to think of the big financial picture when you’re first starting out, but a wedding is just the beginning. Many couples will quickly yearn for a house and kids, but if you’re too busy paying off the wedding bills, it will be difficult to set aside money for a mortgage and a college-savings plan, too. So when deciding what kind of wedding to have, first make a list of other major expenses the two of you will be facing in the next year, five years and even ten years.
Overspending on a wedding is a choice — and a poor one at that.