Saving is an attitude

2013-04-30 10:00

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Getting out of debt is possible, even if the odds seem stacked against you

Mpho writes:

In 2011, after getting advice through City Press, I managed to pay off all my debt. I have since married, and we bought a house and car. Now we are in debt and in a financial mess.

I have two credit cards totalling R27?000, an overdraft of R21?100, plus a revolving credit loan of R11?500. I am battling to service these.

I thought of selling the car, but life without it would not be practical as I have to drop our daughter off at daycare and my wife at her stop for the lift club.

Maya replies:

It must be very disappointing to have cleared all your debts only to find that you are back in the same position.

I remember when you contacted City Press about your previous debts. FNB recommended that you not attempt to buy a house and car as soon as you were married, as it would put too much financial strain on you.

What is required is a change in attitude towards your money. The key here is that you change the way you look at your life.

You need to be grateful and thankful for what you have, rather than always wishing you had more. That is what gets you into debt.

The only way for you to make a real change is to sit down with your wife and make a commitment to changing your lifestyle so that one day you will have real wealth – money in the bank – not money owing to the bank.

Your car is costing you R3?400 a month, with insurance. Find out from the bank how much is outstanding and then find out how much you would get if you sold the car. If you can settle the bulk of the car loan by selling it, that may be the only way out.

If you don’t make some serious choices now and then fail to meet your car repayments, it will be taken from you and sold for next to nothing.

Alternatively, if you have savings, you may need to cash these in to settle your debts. There is no point earning 10% on savings, but paying 30% in interest.

But make sure you keep some money aside for emergencies, so that you do not have to go into debt again because of a crisis.

The rule is to always settle your short-term debts first and cut off all lines of credit. Living on credit is just not an option right now.

Your revolving credit is very dangerous as it keeps you in debt. There is no end date to that loan and this should be targeted first.

If you sell your car, you could use a small portion of that saved money towards meeting your basic monthly expenses (food, electricity) as you won’t be using your credit any more to pay for day-to-day needs.

Then pay an extra R2?500 into the revolving credit and have it paid off in a few months. Alternatively, settle the loan by using your savings.

When you suddenly no longer have that debt, you can use the money you were paying into the revolving credit to settle your overdraft and then your credit card. Your debts will start to fall like dominoes as long as you take on no further debt.

Write up a proper budget and work out how long it will take you to be free of your short-term debt. This will provide a goal and keep you motivated.

If you show determination, you will be free of debt within a year and then you can consider getting a car again. This time, save up cash and buy a basic, second-hand car for R50?000, without incurring more debt.

Getting rid of the debt will change your life. Right now, R6?700 of your hard-earned money is going to debt. Imagine not having to pay that out each month! Once you are free of debt, focus on building back your savings.

It will take determination and commitment, but I believe that within a year, you will change your life. Make this a family project. Put up a wall chart showing how you are doing on your goals.

I suggest you get a copy of The Total Money Makeover by Dave Ramsey. It will provide you with inspiration and a plan.

You can do it. Really, you can! But you must do it now before you get indebted and legal action is taken.

There are three things to consider when investing in property as a group

The best place to save monthly

Kholofelo writes:

My mother, sister and I would like to open a savings or investment plan whereby, together, we would contribute R900 monthly and increase it by R300 yearly or twice a year for five years.

We want to use it to buy property in five years’ time and rent it out. My mom will be retiring in five years and she wants to use part of her payout and our savings to buy property. In this way, we would avoid debt.

Which savings plan can we make use of to invest our money, and are there any other tips relating to our goal?

Maya replies:

It is great that you and your family have a goal to create wealth and are committed to it. Working together will provide motivation.

»?Investing: In terms of investing the funds, it is important you invest in a growth investment that will keep up with inflation as property prices will increase over the next five years.

You could consider a unit trust that invests across a range of assets including equity, property and offshore. Many fund managers believe offshore equities will perform better than South African equities over the next few years so make sure you have some exposure to those.

Based on your contributions, and if the investment returns 12% a year, you should have about R115?000 saved within five years.

Remember that growth assets such as equities (shares) can rise and fall in value in the short term, but over five years they should outperform inflation. By investing monthly, you also limit your risks in terms of share price movements.

»?Tax implications: Rental from property can be a very effective income generator in retirement if managed correctly. In terms of using your mother’s pension payout, make sure you maximise her tax benefits by only using the tax-free portion, which is currently R315?000.

Also consider in whose name you will register the property as this person would be liable for the tax payable on the rental income. Be careful of registering the property in a trust as these have become expensive vehiclesand are no longer as tax efficient as they used to be.

»?Landlord issues: Do your homework and understand what type of property and which area is best suited as an investment property. Find out about rental yields (rent received vs what you paid) and what you need to know as a landlord.

An investment doubles every seven years. The longer you leave it, the faster it grows

Understand income vs growth

Myeza writes:

I am 27 years old and am currently working as a petrol attendant. I am interested in investing for income purposes. I saw that Old Mutual

has an investment scheme called Income For Life, which requires a minimum deposit of R10?000.

Can I add more money to my investment while I’m still working and also request Old Mutual to reinvest the money I earn from interest as well?

Maya replies:

Income for Life is specifically targeted at retirement funds and it is used to purchase an annuity that pays out a set income for the rest of your life. For a 27 year old, this would not be an appropriate product.

Do you need to earn the income immediately or are you able to leave it to grow for some time?

If you can leave it to grow, then rather consider an investment that is aimed at growth, not income, as these have different investment strategies.

An income investment would not aim to grow the capital above inflation and that is what you need right now.

The best long-term strategy is to invest in a fund that has exposure to growth investments, such as shares and property, and then leave it to grow.

Once you stop working, you can then draw an income as your original investment would have grown sufficiently.

For example, if you had R10?000 and earned 5% income, you would get R42 a month. If you left the money to grow – based on historical returns, a market-related investment doubles every seven years – then in 21 years’ time it would be R80?000 and you would earn R330 per month.

Remember that an investment doubles every seven years. The longer you leave it, the faster it grows: year one, R10?000; year seven, R20?000; year 14, R40?000 (the R20?000 has doubled); year 21, R80?000; and year 28, R160?000.

You could, for example, invest in Old Mutual’s flexible unit-trust fund where all dividends and interest are reinvested and you can add more money to the unit trust whenever you wish.

But be careful of investing through a policy. Rather invest directly into a unit trust, which is cheaper.

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