Category Investments

Lessons to be learnt from Boris Becker – avoid falling in the debt trap

11 July 2019 Old Mutual Unit Trusts

Former world number one professional tennis player Boris Becker has been forced to auction off items from his illustrious career to pay off his debts. The former athlete was declared bankrupt in 2017 and as he failed to pay his creditors, his valued personal belongings will be sold off.

Boris Becker – who at the top of his game was earning millions of rands? per year – found himself in this dire situation after excessive spending and borrowing to fund an allegedly lavish lifestyle. But Elize Botha, Managing Director of Old Mutual Unit Trusts, says that anyone can fall into this dangerous debt trap. “With the rise of social media and consumerism, there is a lot of pressure to buy the things we absolutely ‘need’ to appear successful. It’s only human to try and keep up with the Kardashians or Khumalos, but this behaviour of spending money on items that you cannot really afford, instead of saving or investing your earnings and servicing debt on bonds, can easily lead consumers into unwarranted debt that can lead to a downward spiral.”

Botha advises that the best way to regain control over your debt and financial situation is to establish how much money you can put away each month by following the simple 50/30/20 budgeting rule. “This means that 50% of your salary should go to your living expenses, 30% towards servicing debt and lastly, 20% for formal savings and investments. Also be sure that where you do create debt it is for assets such as a house and not to service clothing accounts or buying the latest model of car.”

“Every person is unique, and our relationship with money is often complex. However, you need to be realistic with your financial goals, as you must still meet your monthly financial obligations. Therefore, you need to establish how much you can afford to spend on servicing debt every month without harming your overall savings/ investment goals.”

The first step is to analyse your pay slip so that you know exactly how much money you have after income tax and deductions like medical aid and pension contributions every month, explains Botha.

“Make a list of your fixed expenses such as your bond and car repayments and variable expenses, such as groceries and entertainment. If you are in a position where you have a lot of debt, try and put as much extra money that you can afford so you can pay it off quicker. Essentially, you should also pay off debts with high interest rates first,” Botha concludes.

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