Dealing with debt sensibly

2015-04-30 16:14

LEVELS of household debt in South Africa have improved slightly, but at 78% of disposable income are still much too high.

“At these levels people get stuck in a debt trap, spending nearly all their money to pay the instalments. They don’t have any money left to save and even a small mishap such as a car breaking down could mean defaulting on payments or having to take on additional debt, further deepening the crisis,” says Robert Gwerenge, head of innovation and business development at Direct Axis.

He explains that while some debt, such as a loan to further a child’s education, can improve your circumstances, excessive debt is restrictive and limits your choices.

“A good rule of thumb is to limit your debt to about 35% of your monthly income.”

If you have exceeded this, here are some tips to take back control of your finances.

Record your expenses

Keep track of what you spend your money on. You might be surprised at your unnecessary or frivolous expenditure.

Draw up a budget

Take a piece of paper and draw a line down the middle. On the left-hand side, write down the household income. On the other side, write down all your expenses. Include repayments on loans, buying food, and so on. Cut out unnecessary expenses, but be realistic. If you have money left, save it. You can now save up to R30 000 a year tax free.

Consolidate your debt

This is a financial term for taking out a loan to pay creditors. Only having to repay one loan makes it easier to manage your finances and you will save on the number of monthly account fees. Also, if you spend a lot of income to make the minimum payment on your credit cards, you will save money in the long run by taking out the loan and cancelling the cards. By spreading debt over 24 or 36 months, you will free up cash flow.

Spend sensibly

Certain kinds of debt, such as credit cards and store accounts, are expensive. If you do not want to carry cash and still want the convenience of using a card, get a debit card. Your rule for getting out of and staying out of debt should be that if you cannot afford to pay cash for something, do not buy it.

Shop smarter

Compare prices and shop around for bargains. If you have access to the internet, it is easy to do comparisons. Make use of retail loyalty offers and incentives.

Cut unnecessary spending

Eating out, getting takeaway lunches rather than making your own sandwiches or buying cappuccinos can eat into your disposable income.

Supplement your income

Sell the old bicycles or sports equipment cluttering up your garage. Alternatively, you might be able to earn a second income house sitting or using a skill or hobby such as carpentry or baking to earn a bit more. Use the extra money to pay off high-interest debt first. Then save whatever you have left.

Start an emergency fund

It is a good idea to try and put a little money aside for unexpected expenses. This will mean that when something goes wrong, you will not need to borrow money to solve the problem.

Be wise with windfalls

If you get some additional money, such as a bonus or tax refund, do not squander it. Rather use it to pay off what you owe, starting with the most expensive debt. Try to save a bit. Find out where you can earn the most interest at the lowest cost and remember to ask about tax-free savings options.

Keep at it

Getting out of debt takes time. Cultivate good financial habits and stick to them.

Once you have paid off high-interest debts, shut down store accounts and cancel credit cards so you are not tempted in future.

Save the money you would have used on the monthly instalments

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