Six ways to manage the debt monster

Apr 02 2013 12:04
Cape Town - More than half of Fin24 users who participated in a poll on debt believe it is possible to live without it, while others feel it is a hopeless undertaking.

Some say you have to distinguish between "good" and "bad" debt, and if managed well, the “good” debt can be disregarded as actual debt.

Others feel lack of financial literacy is the big culprit for people resorting to debt to make ends meet.

Nan Mandubu-Mbulawa says to live debt-free is to live stress-free, but there is a downside: "... it's stress free, until you decide to buy a new car or something, then you are told 'we can't assess your risk because you do not have any recent credit history'."

Neo Maragelo says you need debt, but you have to manage it well so that it can work for and not against you.

Vela Nyembe doesn't think it's possible to live without debt: "...how many years is it going to take you to save up for a R500 000 bond?".

Even though it feels like a debt when her homeloan repayments disappear from her bank account, Ruth Erasmus feels buying a house is a super long-term investment rather than a debt.

Other than that everyone can be debt-free "even on small salaries", says Ruth, adding: "I've never had debt apart from my now home loan and up till this point, did not earn all that much either."

Tina Brenner agrees, saying taking out a bond (80% and not more) for a good property is "good" debt. "It is not ok to fly now and pay later or buy food on lay-bye."

Many users think you can only live without debt if you are rich.

The experts disagree.

Sanlam's Karen Muller says not all debt is bad, such as debt incurred when buying a house.

“Debt allows access to ‘big ticket’ items such as property that for most of us would be impossible through savings.

"But it is vital to put extra money away to pay off debt, and to ensure you do not incur unnecessary debt."

Summit Financial Wellbeing's Clark Gardner concurs, saying that debt in itself is not bad, only the indiscriminate and excessive use of it.

Gardner cautions that debt comes at a price. “Long-term debt covered by security is cheaper than short-term unsecured debt.

“Short-term debt is very expensive and you need to weigh up the cost versus the benefit, and whether you really need the money versus wanting the money. For example, borrowing money to go on holiday is not sensible.”

Muller says with some planning you can take full charge of your debt now as well as limit it in future. She lists six steps on how to achieve short-term debt relief:

Step 1: Draw up a realistic monthly budget

List your monthly income and expenses and make sure your income comfortably covers your expenses, save a bit and leave some as contingency. If you have spare cash at the end of the month, use it to clear your debt more quickly.

Try to distinguishing between your wants and your needs – but don’t cut out all of your wants; if your budget is too tight and boring, you are more likely to stray after a month or two.

Step 2: Pay expensive debt first

The higher the interest rate on your debt the more expensive it is, so when paying off debts, pay the most costly ones first. Your credit card and store card debts are likely to be most expensive.

These and personal loans can cost you up to 20% in interest. A tip: if you pay more than the minimum amount owed each month, the interest you owe will automatically decrease.

Step 3: Wise up on finances

Do you go on a spending spree at the beginning of each month and then dip into your overdraft on the 15th? Try breaking bad spending habits. Shop around for the best clothes prices, cellphone package and medical aid deal.

And refer to your budget to see what is not essential in your monthly financial mix.

Step 4: Live within your means

If you can’t afford to pay cash, you probably can’t afford it. If you have to put that Louis Vuitton bag on your credit card, it’s out of your price range.

Opt for a cheaper brand instead. And when buying a car, don’t overextend yourself. Choose a reliable secondhand model and finance it over the shortest period possible.

Step 5: Use cash instead of credit

A debit card linked to a savings account can only be used if there is a positive balance in your account so getting into debt is impossible.

This, or drawing cash, is a foolproof way of staying out of trouble. If you do need to use your credit card, try to pay it off at the end of each month rather than just paying the minimum amount owed. That way no interest will be charged.

Step 6: If all else fails, negotiate to extend repayments

If you genuinely can’t pay off your debt, for instance if you have been retrenched, contact your credit provider to work out a realistic payment plan. This will keep your credit record in check and save hours of worry.

Gardner says: “Prioritise the things that you are going to use debt for.  You can’t have it all.  If you use up your debt capacity on a fancy car and then want to buy a house for your new family, you have a problem.

"The key is to look forward and decide what your priorities are, and then allocate a reasonable amount of your income to service your debt.”

Debt servicing costs should not exceed 30% of your regular net take home pay or 70% of your disposable income after regular monthly expenditure, says Gardner.

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