So you are out of debt, what next?

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Johannesburg - Once people are out of debt, the question normally is what next?

Debt Management Group chief executive Ian Wason says the normal period of recovery in a debt review - which is the process of eradicating high levels of indebtedness - is five years, or 60 months.

His best advice is, once those debts have been cleared, do not start a process again where you fall into a pattern of relying on debt to maintain your lifestyle.

The bottom line is to budget for your needs and not your wants, says Dave Cumming, head of financial planning at DMG.

Funeral policy chaos

Wason warns not to finance your wants through debt funding - so avoid car hire purchase agreements,  loan sharks peddling expensive loans and impressing friends with your new-found financial freedom.

"Don’t go on a new spending spree," he stresses.

Wason, who started the Intelligent Debt Management Group in 2004, says he has come across many cases where a client’s obligations to a multitude of funeral policy providers - which include reputable companies like Old Mutual, Avbob, Sanlam Sky and Metropolitan Life - amount to more than the debtor’s monthly salary.

“You can have a client earning R8 000 a month, but has debt (payment) obligations of R9 000 a month,” says Wason.

Some of his clients had 14 funeral plans, hedging their bets just in case one or more of them did not pay out at the time of a family death.

Outstanding debt

The CEOs of these companies knew there was a problem, but there were armies of salespeople who did not consider the risk profile of clients.

What his company does is contact all the service providers and finds one provider for all the services, such as life and funeral cover. A life policy costing R1 000 a month can give up to R3m in cover, but costs way less than a multitude of funeral policies.

When payments to retail houses such as Foshini or Edgars have mounted up, Intelligent Debt Management talks to the providers to reduce the interest payments on outstanding debt.

The key lesson learnt is that the mistakes already made should not be made again once one is out of debt. Signing a whole host of debt orders, which are deducted from a salary before the worker is paid, is the wrong way to go, the experts say.

Wason says educating people in personal finance products is key.

Bank account

There is a first world financial services industry in South Africa and a third world understanding of the industry.

Children at school are not taught how to avoid debt or how to manage a bank account and workplaces also don’t teach workers how to manage their financial affairs.

The large percentage of the population that has never put money in the bank often means that a worker earning an income for the first time doesn’t know how to manage his or her money.

“In the UK or Germany, for example, most parents have bank accounts so children learn how to handle bank accounts when they are little… here this is simply not necessarily the case.”

Good advice for those in debt review and those who are out of debt is:

* Set aside 70% of your monthly income for “needs” spending, such as food, travel, mortgage costs or rentals.
* Set aside 30% for savings. The IDM Group uses Allan Gray unit trust and money market products to achieve good returns on savings for those on debt review.

Cumming says that many who are now out of debt are “so elated” that they rush out with their extra cash and buy a car, "but resist the temptation", he cautions. 

He suggests starting an emergency fund for hard times – worth about three times one’s monthly take-home income.

- Fin24

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