When you have just graduated from university, the expectation is to find a job, get married and have some kids. There is already that pressure from society on you as a young adult. Aside from that, there is peer and social media pressure. FOMO; the Fear of Missing Out on something. I have been a victim of these. 99.9% of the time these things involve money and if you do not have the will and power of saying no to yourself, friends and family when you know you cannot afford or even just do not want to, you are in big trouble.
Ms. Amina Balunywa
Lecturer – Finance Department
Owning a car definitely creates some social pressure. A car is taken as a symbol of wealth especially for men with the on growing wave of women not wanting men with money. Take Luke for instance who has just graduated. Gets a job that earns him a decent salary of about UGX 1,600,000 a month. After a year, he has saved up enough to open up a side hustle that increases his total monthly income to UGX 1,750,000. This is not bad for a 24 year old. Luke lives by himself and runs a monthly surplus budget inclusive of entertainment and savings of UGX 1,460,000. Every month, he sends about UGX 150,000 back to the village to his mother and sometimes helps put with his younger sister’s school fees of UGX 700,000.
The bank sends him an email through his job that he qualifies for a loan. Luke has everything he wants at this point except a car. He feels that with how far he has come, he shouldn’t be riding on a bodaboda or taxis with everybody else. He applies for UGX 20,000,000 car loan and since he is on a 5-year contract, the bank gives him the log book knowing he will be able to pay back the loan without default. This loan is acquired at a fee of 19% per year for 2 years. This is interest he has to pay back on the outstanding loan balance. For simple calculations, let us say that this spans over the 2 years and in total he will pay the bank UGX 3,800,000 in interest. This is the cost of the money. Again for simplicity, he has to pay about UGX 9920,000 a month. This increases his monthly budget to UGX 2,602,000 and he is now running a deficit. What he spends is way more than what he earns.
Fast forward, Luke has his car, his cost of living increases. He now has got to account for fuel, goes out more because he can leave whenever he wants. Due to the increased standards of living, he starts defaulting on loan payments and money piles. His little sister has to go to school but he doesn’t have the money. So decides to go to a money lender and borrows UGX 1,000,000 at a cost of 20%. He pays the fees and decides to spend the other money to buy a phone. Business is not going well either. His side hustle doesn’t bring in as much as it used to. He pays the money lender below the monthly minimum payment and he is eventually sued. Luke is forced to sell the car but it has depreciated and gets about UGX 14,500,000 from the sale as compared to the UGX 23,800,000 its cost him (interest is always a part of the cost because you have to pay it back).
He finds himself depressed, he cannot help out his mother, he has to go back to using taxis and bodabodas, his parents back in the village blame him for poor judgment, he has to pay legal costs and also has to find a more affordable house so he can be able to pay back both loans. These are some of the effects wanting to look rich, impressing people and poor financial planning. In most instances you end up in some type of financial ruin. Debt can work for you if used well. Like using it to buy assets that appreciate in value like houses, land, a car for business and also education because acquiring skills may increase your ability to earn more. However debt has disadvantages. You commit to paying money for a period of time yet the future is uncertain. COVID-19 came in and there were people in situations like this and lost their jobs. The result is to refinance your loan which usually comes at a cost. So be careful when you are using debt, it’s only for the RESPONSIBLE!