A Fin24 user wants to know if it's possible to save while one has credit cards or an overdraft to pay off.
She writes: "Does it make sense for one to save when there's still credit cards or overdrafts to pay off? The credit cards or overdrafts have interest rates that keep accumulating. Please advise."
Renée Marais NCRDC1780 Independent Debt Counsellor responds:
Let's first look at the interest rate on your savings account vs the interest on the credit agreement.
In South Africa in general the credit facilities e.g. credit cards and overdrafts have high interest and expensive monthly account charges. Pay them off first with a little more than the required amount, which usually only services the debt and does not pay it off.
More important: don’t use the credit card or overdraft. Go to the bank and ask them to adjust the overdraft to enable you to pay it off without access to the facility and give the credit card to someone you trust to keep while you pay off the card. Only use the access to your credit in emergencies.
About savings, it is always a good idea to have some savings if you are in a position to put some money away. I usually tell my clients to have three types of savings: Firstly a literal piggy bank with change for bread and milk.
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My mother in law for an example, saves all the R5 coins during the year and at the end of the year she uses that to buy herself something special. In this way she has bought a Persian carpet, new curtains etc.
Secondly you need short term savings, for example to be able to pay for new tires on your car or the short fall on your medical aid later in the year and lastly, longer term savings e.g. a 30- or 60-day account which allows you to save and have the funds but the accessibility is a bit more difficult. It makes you stop and think before you spend.
You also need to inform the bank that you wish to withdraw funds and in this way the money stays in the bank longer. These longer savings accounts typically earn a bit more interest for you than the ones where you have immediate access. Shop around, banks want us to save and all of them have interesting and worthwhile products.
Most banks also have loyalty programmes that give you something in return. Pick one that suits you.
Pay the savings every month first before you start spending and you will be amazed at how rewarding it is when money starts to grow. There is also a tax benefit when you save, but there is a limit to how much. Check on the SARS website. Use these future savings to negotiate better deals when paying cash instead of buying on credit.
For investment, retirement and other types of savings please contact a registered financial services agent to assist with advice. You are commended for asking such a relevant question.* Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.
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