There are four main reasons our Money Makeover candidates ended up in debt: using credit lines to fund lifestyles, demands by family, unexpected emergencies and poor investment decisions. Yet all of these came down to the same problem – a lack of planning.
By planning for an event, you are able to save towards the goal, earning interest and thereby reducing the time it takes you to have the funds available. If you only respond to financial events by borrowing money, you end up paying interest to a credit provider and taking far longer and spending more to pay off that debt. So, while planning and budgeting may feel like a hassle, every hour you spend preparing will save you money.
- Avoid credit cards and overdraft facilities for day-to-day spending
- Have an emergency fund. Start with R10 000 and build up to three months of expenses
- Set limits with your family as to how much you can support them, and include this in your budget
With proper planning, we can find ways to avoid taking on debt, but it also takes self-discipline as it’s so tempting to access money to get what we want immediately.
Financial controller Samke (26) speaks about her journey into increasing indebtedness: “I ended up in debt because I wanted more money. One of the things I could have done better was to plan. I always used to commit myself to stuff without proper planning. I was always a ‘yes’ person and, when my salary could not cover my commitments, I would apply for a loan because I don’t like to disappoint people around me.”
For environmental affairs officer and single mom Nkosi, her debt journey was also a matter of not managing her finances every month: “I did not have a strict budget, so ended up buying things that were unnecessary; I did not know the difference between a need and a want. As a result, I acquired a lot of debt.”
You have to know how much you are earning and how much you are spending every month. Start an emergency fund and add it to your budget so you are ready for unexpected expenses.
Funding family and education
Municipality fieldworker Bafo took on multiple loans for his family.
As the only person working in his family, he built his parents a home with a personal loan. He was then responsible for his sister, who was still studying, and borrowed money to fund her education. He also decided to continue his studies to get a B-tech in agricultural management at Nelson Mandela University. His final loan came when he needed to buy a car for work.
While he was able to get car finance, the dealer wanted a deposit, so Bafo ended up borrowing money for the deposit at a much higher rate.
Each time he took on a loan, the amount he had to repay looked manageable, but those incremental loans eventually became a financial burden and Bafo has found himself overindebted.
For Thuli, a mother of four and head of operations at an NGO, her finances went awry when two of her children started tertiary education and she had not made provision for them.
“I used credit cards and personal loans to fund their education. I also did not follow a strict budget. As my partner and I have separate budgets, we didn’t combine our resources. I think this is a main contributor to where things are now in terms of debt,” she says.
Rushing into investments such as property can create a serious debt trap. According to Nkosi’s financial adviser Funi, Nkosi’s financial situation worsened as a result of not planning properly in terms of her property portfolio.
“She has good goals of wanting to embark in the property business, but didn’t have a proper financial plan or the knowledge of how much this business would require from her financially without bringing financial strain,” says Funi, who adds that Nkosi used the same salary to accrue two new properties with bonds on top of the one she had not finished paying off. This led her into getting loans to fill the gaps, and eventually running out of cash.
Freelancer Tamsin’s debts are also the result of an investment. While her decision to turn her home into an Airbnb has generated an additional income, she did not plan properly for the loan, which she got from a family friend at an 11.5% interest rate.
Her adviser Leighanne says: “Her agreement was to pay back the interest the lender was receiving from an existing investment at the time. The problem is that Tamsin had put no time-frame in place to repay the capital.”