Debt-free doesn't mean denial

2013-07-25 07:31
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BEING savvy about saving doesn't mean you have to miss out on those little extras that sweeten everyday living, says Lynette Nicholson, head of research at Old Mutual.

“Many people associate the concept of debt-free living with denying themselves the things they want in life. However, the truth is that using practical tips to control debt can help you achieve the things you want in life without damaging your long-term financial situation.”

There can be no doubt that South African consumers are sinking ever deeper into debt as the cost of living rises, a fact which is borne out by the 2013 Old Mutual Savings and Investment Monitor. 

In the context of reports that as many as 6 000 people fill in applications for debt counselling every month and with consumer debt recently topping R1.44trn, according to Statistics South Africa, it’s clear that debt - not even to mention the lack of a savings mindset - is a major concern for the country.

Nicholson says the Savings and Investment Monitor survey - which polled 1 000  metropolitan working South Africans - showed that 62% of respondents have at least one store card, 29% said they have at least one credit card and 17% of respondents have a personal loan from a financial institution.

The survey highlighted a disturbing fact: the vast majority (55%) of respondents who had a credit card pay only the minimal instalment each month, while only 13% choose to pay in full at the end of each month.

“Similar behaviour was revealed with the repayment of store card debts and personal loans. The data shows that an increasing proportion of respondents (72% and 82% respectively) choose to pay only the minimum instalment at the end of the month. "

But paying the bare minimum doesn't make sense from a savings point of view. Nicholson suggests how you can save and stay out of debt at the same time, so that you'll have enough for that special holiday or a new couch:

1. Always pay more than you have to


Minimum payments are a credit card company's way of getting you to carry a single debt almost forever, says Nicholson.
 
For example, assume you have R1 000 on a credit card with an interest rate of 16% per annum, which kicks in from the date of purchase. Also assume the minimum monthly repayment is 2.5% of the amount you owe (i e R25). There are no fees on the account.

By only making the minimum repayment of R25 a month, R13 goes towards paying the interest and R12 towards the actual debt. This means it will take you more than 11 years to pay off this debt!

During that time, you will pay R862 in interest, on top of the R1 000 you already owe - a total of R1 862.

2. Don't be late

The majority of issuers punish late payers with penalty rates as high as 30%. Some issuers and institutions will raise your rate even if you pay their bill on time but are late with payments on other cards.

The simplest way to ensure timeliness is to pay your bills online. Set reminders that tell when your payments are due, or set a date each month to pay your dues automatically.

2. Use debit instead of credit

Debit cards draw money out of your current or cheque account when you make a purchase. Therefore, they don't allow you to overspend as credit cards do. In the scheme of things, this is a huge advantage as you will never fall into the trap of living beyond your means.

It takes discipline – but it’s worth it.

3. Put something away


Even before you've completely paid off your debts, start putting away some money for the future. Instead of spending any bonuses and tax refunds that you receive, put extra money into savings.

In this way, you will build up a savings fund and you won't have to resort to debt if trouble hits. When you get a raise, arrange a direct transfer of the additional amount in your salary to a savings vehicle. If you lived without the money before, you can likely get by without it now.

4. Be patient

There is no magic formula involved in saving and paying down debt - it just takes good habits and a little willpower, exercised in both good financial times and bad.

 - Fin24

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