Avoiding the slippery slope of credit dependency

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The outbreak of Covid-19 and the country’s subsequent lockdown will have wide-reaching consequences for many households. Even before this crisis, people found it hard to make ends meet as salaries failed to keep up with the cost of living. This invariably leads to the slippery slope of credit dependency.

When consultant Peter gave up his well-paid corporate job to join a startup, he didn’t realise how much he needed to live. “I hadn’t taken into consideration all the perks of my corporate salary – the medical aid, car allowance, retirement contributions and bonuses," he says.

Once his startup salary failed to meet the family’s expenses, Peter drew on his savings, retirement fund and then began to make ends meet by using his credit card.

Eventually Peter faced the reality that the business could no longer sustain him. He found work as a consultant which provided a regular income – yet he was falling deeper and deeper into debt.

Until they joined Money Makeover and met with their Absa financial adviser, Leighanne Decker, Peter and his wife, Helen, had never assessed their budget shortfall.

“More clients are starting to finance those last few days in the month via credit. That’s becoming more prevalent as disposable income reduces and the cost of living increases. Instead of cutting the bills and strict budgeting [people] use easy credit,” says Decker.

Peter and Helen are taking stringent steps to turn their finances around by further budget cuts including strict meal plans and cutting back on their children’s extramural activities.

Decker reviewed all their options and recommended they sell their endowment investment. “Peter was paying far more interest on his credit card than returns on the investment. I was also concerned that he had no access to an emergency fund.”

As the policy was past its restriction period of five years, Peter could withdraw the funds without a penalty. (Note: this was done earlier in the year prior to the market crash. Decker says she wouldn’t make the same recommendation now as Peter would’ve made significant market losses).

The credit card has been settled and funds put into an emergency fund. The R5 000 that was going to the credit card (they were spending R5 000 more a month than they earned) helps the couple meet their budget shortfall. “For the first time in years we actually have money left at the end of the month,” says Peter. 

Use lockdown to sort out your finances

Not everyone’s salary has been affected by the Covid-19 crisis. For some, disposable incomes have increased as we can’t go out and spend. Use this opportunity to start that emergency fund and target debts. Take the time at home to sort out your financial admin.

You can follow the journey on social media #CPMoneyMakeover

Facebook : @CPMoneyMakeover,

Twitter: @CPMoneyMakeover and on Instagram: @city_press

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