Avoid debt trap by creating long-term financial responsibility plans

Change is the only constant in life, and one’s ability to adapt to those changes determines the person’s success in life. These are the words of American-born Benjamin Franklin several decades ago, and reflect the efforts of any Nigerian trying to avoid the economic realities of Africa’s biggest economy.

Data show that no government in the history of Nigeria has piled up debt like the current administration. Nigeria’s debt stock has tripled under the current administration to N42.84 trillion as at the second quarter of 2022.

With N42.84 trillion already accumulated in debt, Nigeria’s government insists debt is the only credible route to catalyse development as the government unveiled plans to borrow an additional N8.80 trillion to fund the 2023 budget.

For most financial experts, there is a general consensus that debt is not necessarily bad, however, making a few smart lifestyle decisions and maintaining some discipline can keep it under control.

They believe that debts can offer instant gratification for people who want something they cannot afford, thereby often bearing high-interest rates, eroding individuals’ ability to save and make healthy long-term plans.

For instance, Kalu Aja, a certified financial education instructor advises Nigerians to avoid Nigeria’s debt trap shoes by creating long-term plans for financial responsibility.

“This is different from the annual budget but long-term goals – example buying a house in 10 years, just like the Vision 2020,” he said.

Beyond planning, Aja highlighted the importance of not only having a good budget but also the ability to resist the urge to splash cash during the festive season.

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“Have a budget, but tie your budget to actual cash income, not spending. Nigeria spends all its revenues and does not save. Excess crude account (ECA) is not savings,” Aja explained.

Aja believes delay consumption is an indirect pattern of saving.

“Don’t spend all, have your own Sovereign wealth fund (SWF), this is a state-owned investment fund that invests in real and financial assets such as stocks, bonds, real estate, and precious metals, or in alternative investments such as equity funds or hedge funds. Also, fund your pension, etc” he said.

For Olumide Adesina, a financial market analyst, and quantum economist, it is essential to save money in order to accumulate wealth and have a stable financial future.

“Develop habits to save, it allows you to escape life’s uncertainties and live a decent life as well, for unforeseen costs, such as medical bills, a major auto repair, and living expenses in the event of a layoff, and more is easier when you pay yourself first. The optimal safety net is three to twelve months of living expenses, usually referred to as an emergency fund,” Adesina said.

Adesina advised that as an individual to prevent debt from spiralling out of control, do not spend more than you make.

Nigeria’s federal government intends to borrow over N11 trillion and sell national assets to finance the budget deficit next year.

Nigeria has recorded a budget deficit every year since 2009 averaging about N1.1 trillion in the five years before the Buhari administration came into power in 2015. However, since 2015, budget deficits have averaged N4 trillion.

In 2021, the Federal Government spent the sum of N4.22 trillion on debt servicing, compared to N3.27 trillion spent in the previous year, while revenue only increased by 9.3 percent to N4.39 trillion. Petrol subsidy bill has also soared in recent years.

“One of the most expensive mistakes a person can make is to carry a lot of debt, especially on liabilities as in the case of Nigeria. If you want to better your financial status and create new financial opportunities, pay off your debt as soon as you can,” Adesina concluded.