PRACTICAL STEPS TO GET OUT OF DEBT

Debt is like deceit: a relatively minor transgression can trigger a series of increasingly serious transgressions, each to cover up the previous one, until the situation is worse than anything you could have imagined.

The cycle starts simple, for instance you don’t pay off the full amount on your credit card because you have to settle an exorbitant dentist’s bill that the (insert expletive here) medical aid wouldn’t cover.

Some months later you miss a payment on your car because the debt on your credit card has climbed to the point where it’s a struggle even to make the minimum payment, let alone pay the full amount.

Another few months later you take out a personal loan at a prohibitively high interest rate to get your arrear car payments up to date, after some threatening letters from the vehicle finance company. THE CYCLE GOES ON AND ON AND BECOMES DEEPER WITH EACH DAY!

There’s only one respectable way to break the spiral, and the sooner you do it, the easier  it is. Swallow your pride, own up to your mistakes and make amends.

• Swallow your pride and admit you are in trouble - This is the first and hardest step. Admit that you are having financial difficulties and understand that there's no shame in it. 

• Determine the depth of the you’re in - Figure out whether, with a determined effort, you can climb out of the hole yourself, or whether you are in so deep that you need the help of a Debt Counselor. If such a large portion of your income is going towards servicing debt that you don’t have enough for the basics, such as food and transport, you probably cannot do it alone.

• Do your homework. Going back over a few months, make a detailed list of your income and expenses for each month, grouping your expenses into debt repayments, essential expenses, and non-essential expenses.

• Draw up a frugal-living budget. You can’t be killing  an ant and be consuming an elephant! Cut back on the non-essentials until expenses equal income. Then you need to cut some more – even a saving of R500 a month will help.

• Now tackle the debt. Put the R500 (or more) you’re saving into paying off the smallest debt with a high interest rate. This is likely to be a store account, a credit card account, or a personal loan. It may take several months to pay off the account, which we’ll call account A. Once you’ve finished paying off A, take the whole amount you were paying on A (the regular repayment plus the R500), and add it to your regular repayments on account B, another account with a high interest rate. When B is paid off, you will have an even larger amount to pay off account C: in addition to the regular payment on C, you add the R500 plus what would have been your regular payments on A and B. Get it? On each successive account the amount you have available will be more than on the previous one. So you’re turning the vicious cycle into a virtuous one.

Once you’re at a debt level you can live with (the remaining debts should be only the long-term, low-interest ones such as vehicle loans and your home loan, and realistically their combined repayments shouldn’t be more than a third of your income), you can switch to a “maintenance diet”, by still trying to be as frugal as possible while indulging yourself and your family now and again. 

At this stage you might even begin something that you never thought possible: investing.

TIPS TO SAVING MONEY

Capetown - Many South Africans are still slaves to their pay cheques 24 years into democracy. As a nation, we’re indebted to the tune of R1.7 trillion, with consumers spending money they don’t have.

A survey by 1Life insurance, in which participants were asked whether or not they were in debt and whether or not they save, highlights our lack of financial freedom. Half of the participants admitted they could save only 5% of their salary each month, while many said they
relied on credit to make it through the month. And 72% of the participants were in debt.

Lizl Budhram, the head of advice at Old Mutual Personal Finance, says that according to the most recent Old Mutual Savings & Investment Monitor, an alarming 40% of respondents said they have no formal retirement savings (a pension or provident fund or a retirement annuity fund). 

Although most respondents said they lacked confidence in the economy (only 34% felt confident), Old Mutual’s findings show that a third believe the state will take care of them when they stop working – a statistic that has remained fairly constant. What this means, in effect, is that a large number of employed South Africans will not be financially free when they retire, Budhram says.

Financial freedom is attainable however. And it starts with education. 

Nicky White, a financial planner at Lighthouse Financial Services, says behaviour change is desperately needed. “South Africans are known to live lifestyles that our European counterparts can only dream of. This has resulted in financial indebtedness that keeps us in bondage.”

White believes that financial literacy should start at school to teach pupils about the discipline that is required to enjoy a balance between saving and spending money. “These skills would have a better chance of filtering through to adult life later on.”

Financial freedom starts with a budget. Set realistic goals for yourself and develop the discipline to stick with your strategy to reduce spending. 

“Establish a lifestyle you can enjoy and make peace with that.”

Employ a strategy to pay off expensive debt, such as credit cards and store cards. Not all debt is bad, however. “Good” debt would be a mortgage bond on a property.

“Start setting achievable savings goals to gain financial confidence. Short-term goals could be to save for a tangible item. A long-term goal would be retirement and to leave a legacy.”

It’s a journey that you needn’t embark on alone. White says developing a relationship with a trusted and qualified financial planner, who can help to turn your savings goals into a personal financial plan, is critical.

Budhram suggests paying off your most expensive debt first. “Reduce the debt that costs you the most interest, such as store cards. Consider your long-term goals. Remember that saving money for retirement is your most important long-term savings.”

She says saving for the medium term is vital, too. 

“Save something each month towards an emergency fund. This will prevent you from having to go into debt if unexpected situations strike. Protect yourself against loss of income due to death, disability and critical illness.”

The final step in a financial plan is to draw up a valid will, because you must record how you want your assets to be distributed among your loved ones and how your liabilities should be paid for. 

“A valid will is an essential element of estate planning and includes everything you own and owe – from property and cars to investments and debts.

“Speak to a financial adviser about developing a financial plan that is relevant to your individual needs, so that you can live within your means today while still providing for your future,” says Budhram. “We are politically empowered; now make sure you are able to enjoy the real freedom that comes with being economically empowered as well.”