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  • Writer's pictureRevanno

Don'ts & Do's Series

With all that is going on in the world, it felt appropriate to take a much-needed mental break and rethink the posts for the blog. As I strive to make each piece relatable and applicable to the readers, I decided to withhold some of the pieces I had originally planned to release during the previous months. Given that the Covid19 pandemic has thrown the world into disarray and resulted in many financial issues arising in people’s lives, I wanted to start a mini-series. This particular series entitled “Don’ts & Do’s” will focus on some pressing choices people should closely examine during these financially uncertain times. My points will be based on some of the challenges and missteps I have witnessed happening in the country. I hope that this series will be beneficial to those that read it.


Don’t #1: Take on unnecessary debt


During times of high unemployment and rising prices, it is understandable that people would be in dire need. They have bills to pay such as school fees, mortgages/rents, medical fees and the never-ending costs associated with young children. Unfortunately, as this year has taught us, even though our income streams may stop or slow in pace, our bills have continued to move at the same pace. That has led to many asking the question, “Where am I going to get the money?!?!” The first idea that may come to mind is to borrow funds to keep you afloat. This starts with reaching out to family and friends for a few dollars here and there. In more pressing cases, people resort to borrowing money from formalized lending institutions (e.g. banks).


Before I take a semi-deep dive into the arena of lending practices in the Bahamas, I want to highlight that borrowing is not a bad thing. But it is important to note that all debt is not equal debt.


In my humble opinion, the Bahamian economy relies heavily on its population living off of credit [“Rolle: Bahamians continue to borrow instead of save”]. What I mean by that is, houses, cars, furniture and even vacations are for the most part paid for via the loans taken out by our populace. This is because in order to afford some semblance of an enjoyable life, we have developed a societal mindsight that certain luxuries are needed. But with the average salary being meager at best and a cost of living being one of the highest in the world [“Economy fears: Bahamas Ranked World’s Sixth Most Expensive State”], living a certain lifestyle is not financially feasible for many. That’s where some additional help from Daddy Warbucks (aka the lending institutions) comes into play.


It is common knowledge that the majority of the Bahamas’ workforce is comprised of government and hotel workers. It is also very convenient that these are the members of the workforce that can readily get loans approved before they have received their first paycheck. Why is that? Two words: SALARY DEDUCTION.


Salary Deduction


To those who may not be fully aware, a salary deduction is a formal agreement entered into between an employee, their employer and a lending institution (e.g. the bank). It essentially is a commitment and an acknowledgement that before an employee’s salary is deposited to their bank account, their creditor is paid first. The Central Bank has guidelines for lenders that restricts them from granting loans to borrowers who have 40% or more of their salaries tied up in existing debt. This was a measure in place to mitigate predatory lending. However, it has not stopped it from occurring.


Example: Susan is a government worker and makes $1,000 a month. According to regulations, lenders cannot approve her for a loan that will have a monthly payment rate of $400 or more (the equivalent of 40% of her monthly salary). Susan wants to borrow $30,000 so she can pay some of her bills, school fees buy a car and go on vacation. The lender’s interest rate for consumer loans is 15% (rates usually range between 10-25%) and it compounds monthly. In order for the lender to legally extend a loan without breaching the 40% threshold they will set the term at 20 years. Susan gets approved and agrees to pay the lender $395.04 each month (39.5% of monthly income) for the next 20 years. After Susan would have spent 20 years of her working career paying off the $30,000 loan, she would have spent almost $65,000 in INTEREST ALONE! That means it cost approximately $65,000 in future income for Susan to borrow $30,000.

The example above is a scenario many government and hotel workers face. Because lenders may offer loan arrangements close to the 40% mark, a hefty sum of the borrower’s salary is gone before they even get to see it. Which means in order to afford other staples that are considered “necessary” more debt is taken out through creative accounting means. Thus, people become entangled in a web of debt. This was the reality for many in our population before Covid19. With the added strain of the pandemic and less income being earned, many may view additional debt as the only way to keep afloat.


Debt Considerations


There are some things that should be considered before taking out debt. Am I:


1) Delaying the inevitable?

2) Creating a float to hold me over until I get paid in the near future?

3) Putting borrowed money towards assets that will generate more money?


Points 2 and 3 are the most appropriate reasons for a person to take on debt, especially during the pandemic. However, there are also some rules to consider:


Rule #1: Deeply think about the pros and cons before taking out a consumer loan that is greater than your annual salary

Rule #2: Be cautious about taking out a consumer loan that has a term longer than 12 months

Rule #3: Be mindful of high interest rates


In reference to rule #3, consumer loans usually have the highest interest rates because they are riskier loans. Because these loans are compounded frequently (daily, semi-monthly or monthly) they can result in total payments exceeding the actual amount borrowed (see the Susan example above).


Some Do’s to Consider


So, what are some things that people can do instead of taking on additional loans? The first thing is to manage their expenses. Creating a list that prioritizes expenses by importance and/or amount is a good first step. From there you can determine which luxuries you may have to temporarily cancel. This may mean reducing subscriptions to streaming platforms such as Netflix ($15/month premium), Apple Music ($8/month) and decreasing mobile phone services ($50), and cable & internet packages ($70). Those few luxuries equate to $143 per month, which could be reduced through either canceling the services all together or reducing them to basic plans. You can also discuss a possible payment plan with bill collectors so as to ensure you are in a financial position to meet basic needs such as food, water and shelter. Most importantly, do not shy away from ideas of making money in a new way. This pandemic has brought about a ton of innovation in the country. And with each day that passes there are individuals thinking of new ways to bring in new streams of income. This is a topic that I will expand upon in a later blog.


Until next time folks!


Note: This blog reflects my opinions and is for informational and/or entertainment purposes only. This blog does not reflect the opinions of any organisations with whom I am affiliated. This blog is not intended to serve as a substitute to professional financial advice and guidance. As such, if the reader places any reliance on this blog, he/she alone accepts all risks and damages. Although I am a licensed accountant, please schedule a formal meeting with a financial professional before taking any actions. I reserve the right to change the focus or content of this blog at any time.

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