THE BASICS OF UNDERSTANDING YOUR DEBT

Are you drowning in debt? You aren’t alone

South Africans, like many in the world, have been running up high debts for at least a decade now. Unfortunately, consumers are still racking up extremely high levels of personal debt. We are buying on credit – to buy something instantly - and getting into debt, instead of doing it the old fashioned way: saving up and waiting till we actually have the cash before we buy the items we want.

The thing about debt is that it comes with interest charges added onto it. It’s not rocket science to understand that if you are paying off an item over time with monthly interest charges added, it will inevitably cost more than if you’d paid cash. Multiply your ‘easy monthly payments’ by the number of months you’ll be paying off, and the amount is always higher than the cash price of the item.

Paying off your debt

You should get rid of both short-term debt (credit cards, retail cards, loans) and long-term debt (your bond) with a payment plan as quickly as possible. You could look at it this way:

  • Paying short-term debt first is like going on a diet in which you get to see results sooner because once the debt is paid off, you will have more disposable income.
  • Paying long-term debt is like putting together a fitness programme and knowing that the results will show later (in this case, in a few years’ time) and have positive long-term effects.

How do you know if you’re in over your head?

  • Your spending is more than your income.
  • In the last three months, one of your cheques has bounced, or a debit order or electronic payment on a debit card hasn’t gone through, because there wasn’t enough money in your account.
  • Your account has been closed or you have been asked to return a credit or store card.
  • Most of your bills are two or three months in arrears.
  • You have problems juggling who you will be paying this month.
  • You consider unused credit to be part of your wealth.
  • A debt judgement has been obtained against you.
  • More than 40% to 50% of your income goes towards paying off your debts.
  • More than 25% of your income goes towards paying interest on your debt.
  • You are broke by the first or second week of the month.

How do you escape the debt trap permanently and intelligently?

  • Have a monthly budget or spending plan. If you fail to plan, you plan to fail! Keep working at your budget – update it when you buy groceries, or when your debit orders go off. Be in the loop of your personal spending at all times.
  • Cash is king! Having worked out your budget, you could opt to draw your monthly spending allowance in cash and put it in different envelopes for different needs. This stops you using your credit cards. Just be aware of your personal security when carrying around large amounts of cash.
  • You can also opt to use your debit card, which is essentially paying cash. You do need to monitor your debit card spending though, and keep a careful eye on your budget. As per the first point above, keep an ongoing record of where you are at in your budget on a daily or weekly basis if necessary. You will be surprised at how easy it is to spend money and then forget what you spent it on!
  • Reduce unnecessary spending. If you don’t need it, don’t buy it. For example, take sandwiches to work instead of eating out and cut back on your daily luxury coffee (maybe you could allow yourself one or two a week, instead of daily).
  • As you pay off your retail accounts, close them and cut up your cards to avoid temptation!
  • Do not borrow any more money, particularly from loan sharks whose interest rates could lock you into debt for many years.
  • Speak to people you owe money to, especially your bank. Creditors will be more understanding if they see you have a plan to get out of debt, rather than ignoring the problem.
  • Pay off high interest, short-term debt first, particularly credit cards.
  • Do not gamble in the hope of winning to put money into your debts.

If you feel that you are drowning in debt and don’t know where to turn for help, this useful website will help you: www.ncr.org.za. Here you will find the official website of the National Credit Regulator, which is responsible for regulating the South African credit industry. It gives you useful information and contact details, including how to find a reputable and certified debt counsellor.