QUESTION: If you're strapped for cash and it's days before pay day, is it better to withdraw money from your savings/investment account or should you opt for using a credit card or overdraft facility to cover expenses? Growing up, my Grandma always said stay away from the 2 D's: drugs and debt. Is there a way of using debt efficiently? From a young professional, Sizwe
ANSWER: PK van Schalkwyk, a CA at Fin Global in Hermanus wholeheartedly agrees with Sizwe’s grandmother regarding the two D’s. He says though that in each D’s case, there is an exception.
Drugs can be used when medically prescribed for an illness. And debt can be effectively and productively used to build wealth by financing capital assets like a house that usually appreciates in value. Education or assets like a car, tools, musical instruments etc which can be regarded as investments in income generating ability (necessary to help you earn enough money) can also be effectively financed through loans. As a general principle, one should however never borrow money to finance current expenses, in other words the normal living costs.
And especially younger people/professionals should never use or withdraw savings, or investments, or pension money, or sell capital goods (your accumulated capital/future financial security) to finance normal living expenses. Van Schalkwyk recalls a family member who asked his father shortly before his death what life has taught him. His answer was, “You can trust the Lord to care for you, but never destroy your capital”.
To avoid cash flow problems before payday, one should preferably provide for unforeseen or emergency expenses in your monthly budget. But having said that, everybody (especially young professionals climbing the ladder, getting married, having children or just needing a holiday) sometimes have extraordinary expenses which may cause cash shortages towards the end of the month. What then? A credit card is probably the best option because it gives you up to around 50 days of interest free credit. But it must be used responsibly and the full amount of purchases must be paid at the due date to avoid the high interest on outstanding amounts.
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The budget facility to schedule repayment over six months or so, also activates high interest rates. High interest and responsible use also apply to the use of overdrafts, small personal loans or buying on credit accounts at shops. It is not a no-no to get some bridging finance in the case of contingency situations. Rather consider that than to stop savings/investments payments, or worse withdraw it.
But always be aware that there may be costs and often excessive interest rates associated with these short-term financing schemes. That may land you in further trouble. Therefore “pay back the money” as soon as possible. And never ever start with the practice of paying back one loan with credit from another facility. To avoid this and repay debt as fast as possible will mean a bit of belt tightening in the month(s) after the excessive/extraordinary/contingency spending which caused the cash flow problem. Remember: The large majority of people experience money shortages and have to cut spending sometimes. You have to be short of money from time to time to be able to, at other times, do the things you want to on a sustainable basis.
Especially young professionals with bigger potential earnings later in life, should be careful not to start spending those potential future earnings when they are just starting out.