How to tackle jumbo-sized debt

2012-06-09 12:10

In 2009 Jabulani started a full-time job and was in a position to save R500 a month, which he invested in a savings account.

However, a year later his father died and Jabulani had to take on the financial responsibilities of his family which stretched his finances beyond his salary cheque.

He also had a reduction in his salary due to administrative issues.

Overnight Jabulani’s financial situation changed.

“With all my accounts and debts piling up and my savings depleted I took out a consolidation loan with Old Mutual and I repay R960 monthly. That didn’t solve all my problems but to a certain extent it made things easier knowing I would pay a fixed amount on one debt,” says Jabulani.

Over and above the Old Mutual loan he has to repay a National Student Financial Aid Scheme (NSFAS) loan of R571 monthly and he has a clothing account at Markhams, an outstanding balance on a credit card as well as cellphone contracts.

The good news is that Jabulani’s full salary has been re-instated and he is able to work extra hours which has increased his salary.

This has allowed him to increase his savings into his JustSave account to R900 a month.

Jabulani wants to save as much as possible and to find an investment that will provide a better return.

He wants to further his studies through Unisa.

His brother starts university next year and he wants to save towards the fees.

His longer term goal is to buy a house and car. How can he achieve all of this on his salary?

The Financial Plan

Alastair Bye, Head Of Credit at FNB Smart Loans, says that while it is good that Jabulani wants to save, the interest rates he will earn will not be as high as the rates for this loan.

So it is best to use as much of his free income as possible to settle this debt.

Bye makes the following recommendations:

Balance debt with savings

» With any additional income that he has monthly he should increase his payments to the expensive Personal Loan with Old Mutual. The effective rate is around 55% a year and he is unlikely to find an investment that will give him returns that are that good.

»I would suggest that he reduces his monthly R900 payment to the savings account back to R500 as he had it before, and use the extra R400 to settle his Old Mutual Loan first.

Although it is good to keep saving just a little each month to make sure he has some funds available for emergencies he could even set this savings level lower at perhaps R200 and use the remaining R200 to settle other debts.

» He should take any additional income after that and use it to settle his outstanding card debts.

Firstly because they will have high rates (probably 24% a year) and also it will free up the credit facility on his credit card that he can use for emergencies.

Paying for studies

» Although he would like to save for his brother’s studies for next year I think given their financial standing (and the fact that he qualified for a NSFAS loan himself) I would suggest that they apply for a NSFAS loan for his brother.

The interest rate on this loan is pretty low, and is probably the best rate he would get anywhere.

I would suggest he applies for this loan as early as he can so that he knows if his brother qualifies for the loan or not.

It is good to know where he stands and that way he can plan for next year in advance.

Once he has settled all his other debts he could start saving extra money towards his brother’s studies – but I would tackle the outstanding loan (Old Mutual) and the credit cards first.

» If he manages to settle his card and Old Mutual debts, and has free income again he can then start pre-paying his NSFAS loan if he wants.

The interest rate on this loan is very low however so it is not as much of an “emergency” to settle.

Also their terms for loan settlement are quite generous so it is not such a bad loan to “keep”.

» Regarding his further studies, it is a great idea for him to study further himself. The more highly qualified he is the more he could potentially earn one day.

He should try to seek financial assistance from the department of education which, as his current employer, may provide him with a bursary or they may give him a loan at a very good rate.

He should try to find out about this soon so that he can plan ahead.

Saving for a house and car

» Regarding buying a house or a car I think he would be wise to wait for a while, he has plenty of expenses already and he wants to study next year himself and possibly help his brother to study – which will be additional expenses.

Trying to squeeze his finances even more is a bad idea.

He needs to settle the other debts first and see what their study plans are going to be.

He may have to wait a couple of years before investing in a car or a property.

It is hard to wait for the things we want but being able to ensure he can afford them will put him in a far better financial situation.

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