Levels of household debt in South Africa have improved slightly but at 78% of disposable income are still much too high.
At these levels people get stuck in a debt trap, spending nearly all their money to pay the instalments. They don’t have any money left to save and even a small mishap such as a car breaking down could mean defaulting on payments, further deepening the crisis.
While some debt, such as a loan to further a child’s education, buy a car or do some home renovations can improve your circumstances, excessive debt is restrictive and limits your choices.
A good rule of thumb is to limit your debt to about 35% of your monthly income.
If you’ve exceeded this, here are some tips to take back control of your finances.
1. Record your expenses
Keep track of what you’re spending your money on. You might be surprised at your unnecessary or frivolous expenditure.
2. Draw up a budget
This isn’t complicated. Take a piece of paper and draw a line down the middle. On the left-hand side write down the household income. You can also use an online budget planner. Salaries will probably account for most of your income, but include any additional money you receive such as rent from tenants or payment for doing odd jobs at the weekend. On the other side write down all your expenses. Include repayments on loans, buying food, cell phone costs. Try to cut out unnecessary expenses, but be realistic. If you have some money left over save it. You can now save up to R30 000 a year tax free, so the government is incentivising you to save.
3. Consolidate your debt
Debt consolidation is a financial term for taking out a loan to pay your creditors. Only having to repay one loan makes it easier to manage your finances and you’ll save on the number of monthly account fees. There are other advantages. By spreading your debt over 24 or 36 months you’ll free up your cash flow.
4. Spend sensibly
Certain kinds of debt such as credit cards and store accounts are expensive. If you don’t want to carry cash and still want the convenience of using a card, get a debit card. Your rule for getting out of and staying out of debt should be that if you can’t afford to pay cash for something don’t buy it. If you really want that new flat-screen TV save for it.
5. Shop smarter
Compare prices and shop around for bargains, deals and savings. If you have access to the internet, it’s easy to do comparisons. Make use of retail loyalty offers and incentives.
6. Cut unnecessary spending
Eating out, getting takeaway lunches rather than making your own sandwiches or buying cappuccinos can eat into your disposable income. By just cutting out a R10 cup of coffee each day, you can save R300 a month and R3 600 a year.
7. Supplement your income
Sell the old bicycles or sports equipment cluttering up your garage. Alternatively you might be able to earn a second income house sitting or using a skill or hobby such as carpentry or baking to earn a bit more. Use the extra money to pay off high-interest debt first. Then save whatever you have left.
8. Start an emergency fund
It’s a good idea to try and put a little money aside for unexpected expenses. This will mean that when something goes wrong, you won’t need to borrow money to solve the problem.
9. Be wise with windfalls
If you get some additional money, such as a bonus or tax refund, don’t squander it. Rather use it to pay off what you owe, starting with the most expensive debt. Try to save a bit. Find out where you can earn the most interest at the lowest cost and remember to ask about tax-free savings options.
10. Keep at it
Getting out of debt takes time. Cultivate good financial habits and stick to them. Once you’ve paid off high-interest debts shut down store accounts and cancel credit cards so you’re not tempted in future. Save the money you would have used on the monthly instalments.
For more information on managing your finances visit www.directaxis.co.za/make-a-plan