Money’s too tight to mention 

Mahap Msiza
Tue, 07 Jun 2005
This article is a printout from iafrica.com
Copyright © 2000 iafrica.com*, a division of Metropolis*

Far too many South Africans live beyond their means, racking up debt to support a lifestyle that they simply can’t afford and getting trapped in a cycle of debt.

This happens when instead of putting a little money away each month and establishing some financial security, they spend all their disposable income servicing debt.

“When you’re in this situation an unexpected expense, even a relatively minor one, such as a car needing serviced, some essential household maintenance or a family emergency can turn into a nightmare perpetuating a financial crisis than can bring the whole house of cards tumbling down,” explains René Roux, Old Mutual Bank’s marketing manager.

Sound familiar? If it does, at best you could find yourself without enough money for your children’s education or with no prospect of a comfortable retirement. At worst you could find yourself listed on a credit bureau’s books and face an unpleasant legal battle or even sequestration.

Do something about your debt

The most important thing you need to do to escape the debt trap is to realise your back is against the wall and to start doing something about it, says René.

The first thing you need to do is understand where you’re spending money. Write down where your salary is going each month. Include all your accounts and debit orders, but also remember to record the money you spend on smaller items like food and entertainment. This list of income and expenditure should enable you to decide where you can cut back on non-essentials to begin repaying some of your debts.

Prioritise your debt

Now prepare a prioritised list of all the debts you pay on a monthly basis. Put the debts which attract the most interest on the top of the list. You’ll generally find these are short-term debts, such as shop accounts and short-term loans, while longer-term debt such as car finance and mortgages tend to come lower down the list. Essential payments such as rates or rent should come right at the end.

You’re now in a position to get out of the debt trap by using the savings you’ve made by cutting back on some non-essential expenses to pay off the high-interest short-term debt.

“But remember this will only work as long as you stop incurring new debt,” warns René. “Stop using your shopping cards at least until you’ve paid them off completely. Better still do away with them by deciding that if you don’t have enough disposable income to buy something non-essential, then you can’t afford it.”

The difference between ‘good’ and ‘bad’ debt

She says it’s also important to distinguish between ‘good’ and ‘bad’ debt. A home loan is a good debt, enabling you to buy an asset that over time can improve your financial situation and give you more financial freedom. Contrast this to buying a new pair of shoes or designer jeans on credit. There is no financial benefit and the interest payments mean you’ll end up repaying far more than the item is worth.

“Remember you don’t have to do this alone. If you’ve got a debt problem speak to the financial adviser at your bank. Not only can he or she help you tackle the short-term problem, but will also do a financial needs analysis and draw up a plan to put you on a sound long-term financial footing.”

Once you’ve got your spending and debt under control, it’s useful to find out a little about banking products and how best to use these to suit your financial needs.

Use banks to your advantage

You probably already have a transactional account which you can use to manage your day-to-day finances. A current account is a popular option.

Your salary can be paid in directly and you can arrange for stop or debit orders for regular payments. You will also have a cheque book and an ATM card. The latter can often double as a debit card. This provides the convenience of card that will be accepted for most purchases, but because the cash is immediately deducted from your current account, you can’t spend money you don’t have. This removes the risk of accumulating debt.

Cheques can be useful if you need to pay someone who can’t take a card or when you don’t have cash, but remember that banks will charge you for processing the cheque.

Be careful with credit cards

Managed carefully a credit card can be a powerful financial tool, as it is widely accepted, can provide a useful contingency for emergencies and is generally safer to carry than cash. But René warns not to be tempted to rush out and apply for one until you’ve got your debt under control.

Whether you use a debit or credit card, always keep your receipts so you have a record of what you’ve spent and where you’ve spent it. Then check the receipts against your statement each month to make sure you can account for all the charges made against your card. This will help you with your monthly budgeting and enable you to spot any errors.

“It may take you a little time to do some budgeting, tackle your debt and get onto a sound financial footing, but long term it will pay huge dividends, not only in terms of your financial future, but also your peace of mind. The secret is to do something today — it’ll probably be easier than you think,” says René.