◄Unit 5: Communication, international relations and cooperationUnit 7: Transport, employment, unemployment and their impacton the economy►

Unit 6: How to manage money

  • Unit 6: How to manage money

    TOPIC 2 Sustainable Development: Wealth Creation


    Key unit competence: To be able to manage money as an individual, family and member of society

    Activity

    1. If you had access to funds, identify different ways in which you might save the money for future use.

    2. Examine possible ways in which a person in Rwanda may make investments.

    3. Identify reasons for borrowing money.

    6.1 The link between savings and investment


    Act
    ivity 1
    Answer the following questions.
    1. What do you understand by the following terms:
        a) Saving
        b) Investment

    2. With examples, show the differences between saving and investment.

    The term saving refers to the process of putting aside part of an individual’s income for future anticipated goals. To invest refers to the process of using savings to acquire new or additional productive assets. Investment is the acquisition of additional productive assets capable of growing income (wealth creation). These additional assets generate more income (wealth) to the investor in future.

    Financial institutions receive deposits as savings from members of the public, business organisations and government agencies. Depositors (savers) receive interest rates on the amount deposited in the financial institutions. High interests rates received on deposits attract more deposits from members of the public and business organisations.
                                    

    Savings are carried out on an incremental basis, for example, monthly. The individual’s motivational drive to save is usually guided by his or her set goals. These goals are categorised into time frame periods, for example, short-term, mid-term and long-term goals. These goals usually motivate people to save part of their income. The more the need to accomplish the goals, the large the amount of money will have to be kept aside as savings.

    Activity 2
    1. Identify financial institutions in Rwanda that enable people to save.
    2. Imagine you are currently an employee; suggest personal goals you may want to accomplish with your savings in future.
    3. Examine measures you would put in place to ensure you are able to make regular savings from your income.
    4. Categorise goals identified in question (2) into different time frames, that is, short-term, mid-term and long-term goals.

    Savings are accessed once the specified amount of money is realised. Investments are meant to create wealth. Saving is one avenue of raising enough capital for investment. Th e amount saved is converted into investment in the form of purchasing or developing real estate property, buying machinery, purchasing stocks and bonds, educating children or developing agricultural land through agri-business.

    There is a link between savings and investment. Saving is a source of money needed to make investments. There is a continuous chain of savings and investments in every economy for economic growth to be realised. Investments generate more income, which is then saved or re-invested. Savings continuously provide a pool of capital needed for investments. Savings and investments are guided by goals needed to be attained in the process of wealth creation.

    Activity 3
    Discuss and answer the following questions.
    1. Examine major determinants of investment in our country.
    2. In the wealth creation process, saving and investment have a relationship. Justify this statement.
    3. Explain three ways in which a financial institution’s rates on savings influence investment.


    6.2 Personal reasons for investing rather than saving


    Act
    ivity 1
    Analyse the statement below and answer the question that follows.
    A high proportion of the population in Sub-Saharan Africa lives in poverty.
    Suggest ways in which people in Sub-Saharan Africa may reduce poverty levels and create wealth in the region.

    Savings in financial institutions have lower rates of return than investments, which continuously yield higher returns. However, the risk associated with the two are proportionate to the yielded returns. Th e value of interest rates on long-term savings in financial institutions is eroded by high rates of inflation. Inflation is the increase in prices of goods and services which ultimately cause a decline in the value of money over time.

    Th e amount of money saved in financial institutions, over a long period, may buy fewer goods and services in future. Therefore, it is safer to convert savings into physical assets to gain real value for money in an economy characterised by high rates of inflation. The value of physical assets investment appreciates over a long period. Th e rate of appreciation of physical assets is higher than the country’s rate of inflation. Therefore, investment provides an avenue for a strong financial security in future.

    It is for this reason that individuals and organisations should convert their savings into investments to gain real value for their money. Investments do not only appreciate in real money value over time but also yield additional income. Therefore, the rate of return on the amount saved in financial institutions is lower than the rate of return on investments such as land, shares, stocks, bonds or starting a business.

    Activity 2
    Conduct an interview with people who have invested in shares, stocks, bonds, land or started a business. Ask them the following questions and write a report.

    1. How did you get capital to finance your investment?
    2. What are your reasons for investing your money in the ventures you chose rather than saving the money? Analyse the testimonies given.
    3. How did you get financial advice?

    6.3 Impact of saving and investment on wealth creation


    Activity 1
    Appreciate the effectiveness of savings in securing one’s future.

    Personal wealth is a wide range of individually owned physical and financial assets. These include cash deposits, real estate property, bonds and stocks, retirement benefits, life insurance and mutual funds. People strive to increase their personal wealth in their lifetime.

    Wealth creation provides financial security to people and improves their standards of living. As pointed out earlier, savings and investments are critical to wealth creation. Savings provide seed capital for investment. Short-term savings should be invested to gain value for money and increase the stock of personal wealth.

    Long-term savings, cash deposits held in financial institutions for a long period, impact negatively on wealth creation. Th is is because inflation erodes the value of cash deposits held in financial institutions over a long period. Wealth creation may either stagnate or reduce in real value due to high rates of inflation. Therefore, it is beneficial for people to invest in short-term goals to gain value for their money and increase the stock of personal wealth.

    There is a need to make wise decisions when choosing the type of investments. Before investing, an investor should consider the rate of return of each investment and the risks involved. If the rate of return on the specific type of investment is low, then the growth of personal wealth may not be guaranteed. Risks are defined as uncertainties of receiving expected returns or the possibility of losing money in a prioritised investment. Therefore, there is need for an investor to assess and critically evaluate each type of investment before investing.

    One should also consider the diversity of investments while making investment decisions. Diversification of investments creates positive impacts on wealth creation. Not all investors are knowledgeable about financial investment matters especially evaluating rates of return and risks associated. Therefore, an individual interested in making investments should consult financial planners. These are professional advisors on financial matters of investment planning, credit management, risk management and retirement planning.

    Activity 2
    Research and answer the following questions.

    1. Identify types of investments that are considered risky and those that are considered less risky in the country.
    2. Give reasons why the types of investments you mentioned in (2) above are classified as such.

    Case study
    Kayitesi is a small-scale farmer in Nyanza District. She does not earn a lot of income from her small farm. In 2015, during the world’s savings day on October 31st, she got to learn about the informal savings group known as Ibimina. During the special savings week, Umurenge SACCO in her sector were sensitising people about the importance of saving for a brighter future. Together with other people in her village she decided to join a savings group. She was taught how to reduce spending and keep some money aside for saving. She was able to save some money which she used to purchase a dairy cow. Nowadays, Kayitesi is able to sell milk to villagers and this earns her an additional income. This move has enabled her to improve her standard of living. She also participates in raising other people's awareness about the need to save and invest in order to secure their future.

    Activity 3
    1. Identify stakeholders in the country who participate in raising people's awareness through sensitisation campaigns about the culture of saving.
    2. Assess the efforts of the stakeholders mentioned in question (1) above.3. If you had access to some savings, explain investment ideas you would have to boost your income.

    6.4 The risks and rewards of various forms of investment


    Activity 1
    Identify types of possible risks that an investor may expect to encounter in Rwanda.

    Risky investments are those that have a possibility of loss of capital invested. Risky investments also bring about uncertainty in terms of the expected income from the investment. Investors assess the risk-related conditions of a potential investment decision. Potential risks are incorporated into the decision-making process of an investment. Possible risks are identified and managed appropriately so that the real value of invested capital is ascertained.

    The reward one gets from an investment is the value that accrues from the invested capital over time. These rewards are also known as returns on an investment. Th ere are several forms of investment that an investor can invest in. They comprise of investments in real estate, corporate bonds and stocks, government securities, mutual funds, retirement benefits, money market, life insurance, agri-business and other businesses.

    6.4.1 Real estate investment

    Real estate refers to physical assets that consist of land and buildings on it. Real estate investments are of two categories; residential and commercial real estate.

    a) Commercial real estate has real income-generating properties. Investors in commercial real estate draw a regular income from renting out their premises on a monthly or yearly basis. Th is is the most lucrative form of investment because it gives high value returns on investment.
                                     

    b) Residential real estate consists of structurally designed dwelling units for households. These are usually designed to accommodate people according to their social and economic status.
                                  
    Activity 2
    Find out strategies used by investors to assess property that possess high value returns on investments. Analyse these strategies and present them in class.

    Rewards of real estate investments

    i) Th ere are high rates of returns because of a high demand for residential and commercial real estate in rapidly growing economies of developing countries.

    ii) Real estate is not easily prone to inflation because it appreciates in value over a period.

    iii) Real estate is easy to maintain and manage; therefore, it does not incur a lot of costs.

    iv) Real estate is more risk free than other forms of investment.

    v) Creditors readily accept real estate investment as collateral securities and therefore, one can access funds from financial institutions to make other investments.

    Risks associated with investing in real estate

    i) Construction of real estate is time consuming. Therefore, capital is tied up for a considerable period before yielding rewards and the value of investment may be affected by inflation before completion.

    ii) Some real estate properties may be prone to vandalism due to political violence. This scares away tenants and reduces the amount of income (rent).

    iii) Demographic changes, such as declining population, reduce the demand for occupation of residential real estate.

    iv) High rates of unemployment lead to loss of income from would-be investors in residential real estate.

    v) Investors in real estate face liquidation challenges of the real estate developments. Owners of such property, who need immediate cash, may not gain real value for their money because the properties are sold at low market value.

    Activity 3
    Answer the questions below.
    1. Explain other risks which threaten the flow of income to investors of real estate.
    2. Examine the risks associated with investing in real estate and come up with solutions you would use to curb them.

    6.4.2 Corporate bonds investment
    Corporate bonds are loans advanced to corporations for a specified period by members of the public or other corporations. These enable corporations to raise money and expand their financial operations. Investing money in corporate bonds means lending money to corporations at a fixed interest rate. The interest is paid in a lump sum upon maturity. Corporate bonds are grouped into three categories. They include:

    • Short-term bonds: the maturity period of this category is not more than five years.
    • Mid-term bonds: the maturity period exceeds five years and up to a maximum of twelve years.
    • Long-term bonds: the maturity period can last for more than 12 years.

    Investments in corporate bonds are done through direct purchases during the initial public offering or purchased in the stock market. Corporate bonds are tradable securities offered for sale in the stock market. Some corporate bonds are sold before maturity.

    a) Rewards of investing in corporate bonds

    i) Corporate bonds yield a steady and regular flow of income because their value in the market is stable.

    ii) Returns are generally higher than those obtained from government bonds.

    iii) Th ere are diversified corporations to choose from in all sectors of the economy. One is able to purchase the lucrative ones.

    iv) The stock exchange market provides a market for corporate bonds where they are freely traded before they mature. This provides an investor with an easy avenue for liquidation from the sale of bonds in case they need cash immediately.

    b) Risks associated with investing in corporate bonds

    i) Th e rate of inflation in rapidly growing economies is high. Consistent rising rates of inflation over time reduce the value of corporate bond investments in the market.

    ii) Both internal and external environmental factors may affect a company negatively and result in losses. Th is may lead to a company defaulting in the payment of corporate bonds because it cannot meet its debt obligations. An investor may lose part or all the money invested in corporate bonds.

    iii) During an economic recession, there is low demand for corporate bonds in the stock exchange market. An investor may not sell corporate bonds at the real market value. Therefore, they may be sold at prices below the real market value resulting in the loss of value of investment.

    iv) Some companies may decide to redeem their bonds at the market value before maturity. At times, the market value may be lower than the initial value of the corporate bond. Therefore, an investor will lose the value of bonds.

    v) Th e possibility that transfer of political power may usher in a government whose policies are unfavourable to investors poses a risk. This may bring about instability in the financial market and investors may lose the value of their corporate bonds.

    Activity 4
    Find out how corporate bonds are traded in the stock exchange market in Rwanda. From the information gathered, answer the following questions.

    1. Identify five corporations that are attractive to investors of corporate bonds.
    2. Discuss reasons why these corporations attract more investors than others do.
    3. If you are an investor in the Rwanda Stock Exchange, examine ways in which you may reduce the risks to your corporate bonds investments.

    6.4.3 Government bonds investment
    Governments raise revenue to bridge the national budgetary deficit from both internal and external sources. Internal sources of raising revenue include issuing treasury bonds and treasury bills. These are also called government securities. Treasury bills are short-term financial debt instruments that mature in a period of not more than one year. Treasury bonds are long-term debt instruments that mature in a period of over one year.

    A sovereign bond is a financial debt instrument in either local or international currency. It is sold to foreign investors. Several African countries like Nigeria, Ghana, Kenya and Rwanda, have issued sovereign bonds to raise money from external sources. Through sovereign bonds, foreign investors lend money to the issuing governments and in return, investors receive interest.

    a) Rewards of investing in governments bonds

    i) Government bonds are secure and do not easily default on their payments so investors in government bonds are guaranteed payments.

    ii) Government bondshave attractive yields from interest payment.

    iii) Government bonds off er the best alternative of diversifying investments. Diversification of investments safeguards wealth creation and cushions the effects of risks.

    iv) Government bondsare easily liquefied in the stock exchange market. Therefore, an investor who wants his or her money before the maturity date may access it.

    b) Risks associated with investing in government bonds

    i) High risks of inflation affect investors of long-term government bonds. The amount, in face value of principal bonds and accrued interest before the date of maturity, will lose value due to inflation.

    ii) Interest rate paid on government bonds is set at the time of sale and is not variable over the life of a bond. Interest rates may rise after the time of the purchase of bonds. As a result, investors in the stock exchange market may not be willing to buy older government bonds. This is because they have low interest rates.

    iii) A country’s government bonds are issued in the local currency. The loss in value of the local currency leads to loss of value of government bonds upon maturity.

    vi) There may be risks resulting from the possibility of a government defaulting on its debt payment obligations. This mostly affects the economies of failed states.

    v) Th ere are risks during a change of government or when a country is at war. In such situations, the value of government bonds goes down. The sale of such government bonds in the stock exchange market is affected.

    Activity 5
    Answer the following questions.

    1. Imagine you are a stock broker at the Rwanda Stock Exchange market. Give your point of view on why it is profitable for one to buy government bonds.
    2. Discuss the risks and rewards of other alternative forms of investments, for example, starting a business, investing in agri-business, mutual funds or the money market.

    6.5 Difference between savings with a bank and other forms of investment


    The two concepts of ‘saving’ and ‘investment’ have been distinguished clearly at the beginning of this unit. However, there are differences between savings with a bank and other forms of investment. These include the following:

    1. Savings with a bank are safer (no risks expected) whereas other forms of investment such as mutual funds, stocks, bonds, starting a business or buying property carry risks. In a number of countries, savings deposits held in financial institutions such as commercial banks are state-insured. Many countries have created deposit protection funds to compensate for deposits lost when bank failures occur.

    2. Th e real value of savings in a bank may be eroded in the future due to inflationary tendencies of world economies. Th e present value of money saved in a bank may buy fewer goods and procure fewer services in the future. The present value of money invested elsewhere is likely to appreciate in value over the general inflationary economic tendencies.

    3. Savings with a bank attract low returns due to low bank interest rates on saving deposits whereas other forms of investment yield higher returns on invested capital.

    4. Savings with a bank are readily liquidated, that is, cash may be withdrawn at any time to meet unexpected expenses. In other forms of investment, it is not easy to liquidate the cash invested, therefore, it may take some time before cash is realised to meet unexpected expenses.

    5. Savings with a bank are usually done to meet short-term goals, whereas other forms of investment are usually undertaken to meet long term goals.

    Activity 1
    Examine the differences between saving with a bank and investing.


    6.6 Borrowing

    Borrowing is receiving a valuable asset from an individual or organisation with an obligation of paying back at a future date. It simply means acquiring debt and becoming a debtor to a creditor. Most individuals, corporations or government organisations borrow to fulfil their financial obligations. Financial institutions off er a variety of loans with flexible terms. Depending on the needs of a borrower, one has a wide variety to choose from.

    Activity 1
    Answer the following questions.
    1. Identify the different reasons why individuals, corporations and the government borrow money.
    2. Examine the different sources from where individuals, corporations and the government may borrow money.
    3. If you had access to money and your friend wanted to borrow from you, assess the different factors you may consider before lending the money to them.

    6.6.1 Reasons for borrowing
    There are reasons why individuals, business organisations and governments borrow resources. Some of the major reasons are outlined below. They include:

    a) To build or purchase a personal asset such as a house or a piece of land.
    b) To educate children or for self-education.
    c) To meet emergency obligations such as unexpected medical expenses or car accidents.
    d) To acquire more investments to increase the flow of income. There is an expected hope that yields from increased investments will repay the debt acquired.
    e) To purchase essential personal items such as a car.
    f ) To finance government projects.
    g) To expand a business.
    h) Governments borrow money when the tax revenues collected are less than predicted.

    6.6.2 Sources of borrowing

    Activity 2
    Discuss the various sources that individuals, businesses and governments may borrow money from.

    The best sources of borrowing depend on a number of factors such as the nature of a borrower, the nature and size of corporations, the nature and size of investments, the creditworthiness of the borrower and the amount of credit capacity of the creditor. The major sources of borrowing are:

    1. Internal sources - these include borrowing from friends, family members and social groups. Th is is an informal source of borrowing that depends entirely on the relationship one has with family members, friends and social groups.

    2. External sources - these include borrowing from financial institutions such as commercial banks, micro-finance institutions and international financial institutions (World Bank Group). These sources loan credit to interested individuals, governments and investors.
                                  

    6.6.3 Advantages of borrowing

    a) Borrowing enables one to finance large projects that are expensive. This includes expenses like taking out a mortgage, buying land, building a house or paying for higher education.

    b) Financing large projects may use all the savings set aside. However, access to borrowed funds enables one to cushion oneself in case of an emergency.

    c) Borrowing helps to build trust between a lender and a borrower.

    d) If one borrows money to start a business, profits from the business can be used to off set the loan.

    e) Borrowing enables an individual or businesses to off set bills if there is no cash at hand.

    f ) Borrowing enables the acquisition of more investments to increase the fl ow of income.

    6.6.4 Disadvantages of borrowing

    a) A lot of documentation is required before advancement of credit from a financial institution. More often, banks require creditworthy guarantors. This makes the process lengthy.

    b) Most financial institutions require collateral as security to recover credit advances in the event that a borrower defaults. One may not get access to credit if one has no collateral.

    c) Interest rates of financial institutions are comparatively high. Servicing the interest rates requires a regular fl ow of income.

    d) Credit may be recalled before the expiry of the agreed repayment period. Th is may make it difficult for a borrower to meet the whole amount of credit advanced.

    e) Defaulting on credit repayment may damage the creditworthiness of a borrower. In the event of default, a financial institution sells the collateral or security asset at a lower market price, just enough to cover the credit default. Th is decreases personal wealth.

    f ) An elaborate dialogue on the intended purpose of borrowing is required. There is always a need to provide satisfactory proof of the intended purpose of credit. This may hinder some people from borrowing.

    g) Family, friends and social groups critically assess the character of the borrower. Individuals who spend money extravagantly may not easily be advanced credit.

    h) Borrowing from friends, family and social groups is limited especially in poor economies where a greater proportion of the population lives in poverty.

    Activity 3
    Answer the following questions in groups.
    1. Assess the pros and cons of borrowing.
    2. If an investor wanted to borrow funds, would you advise them to borrow from friends or financial institutions? Justify your reasons.
    3. ‘Borrowing from friends, social groups and family members is a major cause of social friction’.Do you agree or disagree with the statement above. Give reasons for your arguments.

    6.6.5 Rights and responsibilities of a borrower

    Creditors (lenders) and borrowers (debtors) have a bond of agreement which protects them. These protections are clearly spelt out as lenders' rights and responsibilities and borrowers' rights and responsibilities.

    a) Rights of a borrower (debtor)

    1. A borrower should have access to information regarding the effect borrowing has on the eligibility of other forms of financial aid.

    2. Access to information regarding loan obligations such as,

         a) penalty for late repayment or defaulting on loan repayments

         b) clearly spelt out statement on disclosures, for example, loan balance

         c) necessary legal documentation.

    3. The lender should provide a borrower with detailed information regarding the repayment schedule.

    4. A borrower has the right to a grace period required before the commencement of loan repayment.

    5. A borrower is entitled to a reward for repayment of credit in full before the expiry of the repayment period.

    6. Th e lender must provide a promissory note or proof of cancellation of a loan upon completion of loan repayment.

    7. A borrower is entitled to an explanation of the fees charged during the repayment period.

    8. A borrower should know the name of the lender and where to send the payments.

    b) Responsibilities of a borrower

    1. An express written commitment to the creditor to honour debt repayment in full.

    2. Notifying the creditor of a change of physical location, e-mail address, residential area and new mobile phone number.

    3. Notifying the lender of changes such as the name of new employer, change of job and address of the new employer.

    4. Giving notice to the lender of possible changes in loan repayment.

    5. In case of stolen items, communication to the lender should include a police abstract.

    Activity 4
    Visit a financial institution near your school. Ask for a meeting with a resource person from the credit department. Ask him or her the following questions.

    1. How do they evaluate the creditworthiness of a borrower?
    2. How does the financial institution recover credit loaned to a borrower in case he or she defaults in loan repayment?
    3. How do they make decisions on whether to give or deny credit to a borrower?

    6.7 Debt


    Debt arises when credit is borrowed by individuals, organisations or the government. People borrow money to satisfy their wants or fulfil their immediate obligations. Debt is settled by offering money which is acceptable by the creditor. Interest is widely accepted as a reward to the creditor for advancing credit to borrowers. With interest calculated in agreed percentages, debt is part of trade. Today, governments, business organisations and individuals are debtors to other governments, business organisations and individuals.

    6.7.1 Types of debt

    1. Bank loan debt: this is money borrowed from financial institutions.

    2. Student loan debt: this is money loaned to students by state corporations to finance higher education and training. The loans are given at low interest rates.

    3. The hire purchase debt: this is debt incurred by buying goods such as cars, machinery and electronics by paying in instalments. However, you do not own the item until the last instalment is paid.

    4. Credit card debt: this is a short-term loan stored in an electronic device known as a credit card. One uses the credit card to buy goods and pay for services. One incurs a credit card debt once the grace period has expired. The debt is paid with a high interest rate.

    5. Salary advance: this is a short-term loan advanced to individuals in paid employment and is repaid on pay day.

    6. Loan shark debt: this loan is given by unlicensed moneylenders to desperate borrowers who require money urgently. They off er loans at high interest rates. In case of default, more interest on the principal amount is added to the debt.

    7. Public debt: This is debt owed by a government to domestic and international lenders. Debt is categorised as unsecured debt (without collateral) or secured debt (with collateral).

    Activity 2
    Answer the following questions.

    1. Research and find out other types of debts not discussed in this book.
    2. Identify the most common type of debts that people incur in the country.
    3. What makes the type of debts you identified in question (2) above common?

    6.7.2 Debt management

    Debt management is the process of learning to manage debts wisely in order to improve the credit worthiness of an individual or organisation. It deals with issues that include prioritising expenses, debt reduction management and closely working with the lender to help manage debts. Properly managing debt is beneficial to governments, business organisations, individuals and families.

    Debts present challenges to borrowers because too much debt overwhelms and stresses a borrower. Strategies have therefore been developed by debt management experts to manage challenges of debt repayment and control. Similarly, in our increasingly globalised world, many developed and developing countries have acquired huge amounts of public debt which overburdens many nations. The World Bank and IMF have focused their attention to the management of public debt in developing countries.

    Activity 3
    Discuss and suggest ways in which a borrower should manage debt.

    6.7.3 Managing personal debt

    1. A debtor should communicate with the creditor frequently. This may be done by getting in touch with the creditor to assess the progress of debt repayment.

    2. Communication should be done in writing. All the correspondence sent and received by the debtor should be kept safely.

    3. Prioritisation of debts. Bigger and secured debts should be given first priority.

    4. Re-evaluate personal financial position from time to time. This should be done to ascertain the ease of debt repayment and avoid unnecessary expenditures.

    5. A debtor should be committed to repayment of debt at all times. When a debtor experiences financial difficulties, he or she can repay the debt in smaller amounts.

    6. A debtor should constantly look for extra financial resources. Seeking jobs with better salaries and remuneration strengthens a debtor’s ability to repay debts.

    7. Debtors need to attend court cases if the creditor has sought legal redress over non-repayment of debt. A debtor should heed court summons.

    8. Debtors should be wary of making promises which they may not fulfill. This may cause them more financial problems. Debtors should always be honest about their financial situation.

    9. Debtors should not borrow to repay debts. This may not solve their debt problems.

    Activity 4
    Explain the impact of incurring many debts. Suggest measures an individual with many debts may use to improve his or her financial situation.

    6.8 Impact of too much debt on family members, society and national economy


    6.8.1 Impact of too much debt on family members

    1. If parents or guardians are in debt, it affects the provision of basic needs for their dependants.
    2. Families that have debts face challenges, for example, frequent evictions from rented accommodation. 3. Too much debt may strain marital relationships. It may lead to prolonged conflicts between spouses resulting in separation or divorce.
    4. Families in too much debt may end up in a vicious circle of debt. This leads to incurring more debts and it worsens their social, emotional and psychological well being.

    6.8.2 Impact of too much debt on society

    1. People in too much debt may resort to criminal activities which increases insecurity in society.

    2. Individuals in a society may commit suicide due to huge debts. This poses a challenge to members of the society because children may be left without parents or guardians to provide for them.
                                  
    3. Individuals in a society who are deeply in debt may not become productive in their workplace. If members of the society are not as productive as they ought to be, this affects the society economically.

    Activity 1
    1. Discuss the impact of too much debt on individuals, families and society in Rwanda.
    2. Write an article to the editor of a local daily in the country. In the article, address the importance of managing finances to reduce poverty in society.

    6.8.3 Impact of too much debt on the national economy

    1. Criminal activities are costly to the government. This is because national resources are used to address criminal activities. Such resources would have been used in other sectors of the economy for the country to achieve economic development.

    2. Too much debt reduces savings among individuals and families. This leads to low investments and minimal growth of the economy. This, in turn, lowers the capacity of the economy to create job opportunities and raise revenue for the government.

    3. Families and persons who have huge debts spend less on goods and services. Inadequate demand for goods and services affects the economy. Economic recession may set in and an economy may collapse.

    4. High taxes are raised to finance a public debt which worsens the economy. Long-term public debts place a heavy burden on future generations who have to repay the debt.

    5. National resources are channelled towards repaying public debts. This leaves fewer resources for developing the economy and developing projects in a country.

    6. Too much public debt results in high rates of inflation in an economy. This makes the cost of living in a country go up and the majority of the population is not able to meet their needs.

    Activity 2
    Discuss and answer the following questions.
    1. Discuss ways in which too much debt in families in Rwanda may be managed.
    2. Suggest ways of reducing public debt.
    3. Research and find out African countries that have too much public debt.
    4. Discuss steps taken by the countries to reduce public debt and improve the economy

    Assessment Exercise 6.0

    1. Differentiate the terms savings and investment.

    2. Explain reasons that motivate people to save part of their income.

    3. Discuss why increasing rates of inflation are considered undesirable to investors.

    4. What do you understand by the term real estate?

    5. Explain factors which may discourage people from investing in real estate.

    6. Discuss the risks associated with investing in corporate bonds.

    7. Identify government securities traded on the Rwanda Stock Exchange market.

    8. What would inform your personal reasons for investing rather than saving with a bank?

    9. Compare and contrast investing in corporate bonds and real estate as alternative forms of investment available to Rwandan citizens.

    10. With knowledge gained about debt management, describe how you would fulfill your personal payment responsibilities.

    Project

    1. Analyse the link between saving and investment.

    2. In an essay, justify the impact of debt to an economy.





    ◄Unit 5: Communication, international relations and cooperationUnit 7: Transport, employment, unemployment and their impacton the economy►