Debt doesn’t mean the end of the road

Debt is a scary four letter word, although the reality is that many have debt, good or bad.

Get out of debt

Don’t be a prisoner to debt

Financial fitness should be top priority and the secret of getting ahead, says Lezanne Human, chief executive officer of FNB Savings and Investments, is finding the right balance.

She explains that incurring debt does not mean that you are financially unfit as many financial portfolios may include some level of debt at various stages.

“It is near impossible for the majority of South Africans to save up to buy a home or car without having to incur some form of debt,” says Human. Human says the trick isn’t to avoid debt altogether, but instead to find the right balance between paying off debt while continuing to save.  This seems counter intuitive, as one automatically assumes that you are unable to save while paying off debt.

Research conducted by FNB reveals that 54.2 percent of the South African banked population who save are currently paying off sizeable debts.

Consumers need to identify the items they will save up for and the ones they will need to finance.

One may, for example, incur debt when buying a house whereas going on holiday is something that one should save up for, advises Human.

“Savers understand the importance of continuous saving regardless of the other financial commitments they may face.”

She notes that although they may save more or less at certain stages of their lives, they will try to find some form of balance in an attempt to reach their savings goals.

The Ministries of Finance and Trade and Industry have echoed concerns regarding levels of consumer debt, noting that many consumers default on making their monthly contribution towards their savings and policies or resort to taking out cash loans just to cover everyday living costs.

If the above sounds familiar, resorting to quick and easy loans such as those offered by Wonga or Cash Converters, then you are likely skipping on your savings and other important monthly contributions. Johan Maree, chief executive officer of FNB Credit Card, says buying on credit or taking out cash loans to service small shortfalls can quickly snowball into bigger problems.

“Making your minimum payments of various accounts becomes an increasingly harder task if you are continuously spending more on credit to make ends meet.  “Interest on additional loans can be so high that you will be wasting money on interest when you could have started paying off some of your debt,” he warns.

Dealing with debt means acknowledging and being honest with what you owe, finding a way of paying it off without borrowing more than you already have and of course, keeping a fine balance.

Time to take stock – Maree offers practical tips to help you:

Cycle of debt

Break free from the cycle

1. Assess your debt

Assess your debt in terms of minimum payments and highest interest. Although it is ideal to always pay more than your minimum payment, the first few months of the year might be the right time to stick to the bare basics.

“It is better to ensure that you make minimum payments on all your outstanding accounts than to miss or fall short on payments.

Always aim to pay the highest interest bearing debt off first without falling short on other payments. Once this is paid off you will be able to increase the installment on other high interest bearing debt to pay the left over debt off faster and at more competitive interest rates.

2. Shop smartly and plan ahead

Keep your eye out for store specials and compare prices to keep your additional expenses to the minimum.

He says we become so accustomed to using certain brands that we often miss out on inexpensive brands that are just as effective.

It is also ideal to record every expense for the month, these include groceries, clothing, electricity and on-the go expenses such as takeaways, lunches and dinners so that you can gauge where there is space to cut down on spending and clear your debt. 

3. Debt consolidation

Speak to your bank sooner rather than later to discuss the options available if you suspect that you might run into problems with meeting your minimum payments.

Erase your debt

Erase your debt

Consolidating your debt allows you to merge retail store debt, short-term loans, personal loans and other credit card debt into one account.

“The pros of debt consolidation are that it allows you to pay your debt off over a longer period, at a lower interest rate and makes managing debt easier as all debt is housed in one account.”

However, he points out that debt consolidation will not help customers who spend above their means to curb their spending and save more.

4. Take control of your finances

The majority of South Africans have some or other form of debt – whether it is retail store accounts, a home loan or vehicle finance.

What is important to know is the realisation that the credit limit you are eligible for is a maximum limit and that having maxed out your credit facilities on a month to month basis could be the start of a downward debt spiral.

He warns of spending your maximum credit amount just because it has been awarded to you and adds that it is important to take control of one’s finances, knowing what you are able to comfortably afford and stick to it.


- Courtesy of Property 24