Help clients to repay debt, while keeping up their savings

South Africans are drowning in debt. According to the National Credit Regulator, around 24 million of us have debt of some kind, and almost 10 million people have trouble repaying it. Given the struggle with high debt burdens, how can financial planners assist clients to repay their debt while still continuing to save money for the future?

Kobus Swart, Head of Sanlam Key Solutions, says bad money habits can prevent consumers from forging ahead with their financial plans. This not only affects the consumer, but also the sustainability of your practise as their financial planner.

“Financial planners can play a critical role to help their clients break poor spending habits. They have an important task to help clients evaluate their financial scenario so that when life throws them a curveball, they are able to manage the financial implications instead of being forced into deeper debt levels,” he says.

Swart says the first step to shift indebted clients to a better financial position is to guide them to acknowledge their debt problems and express the commitment to change their financial future for the better. The next step is to demonstrate to them the importance of planning. To do that, he says, requires an understanding of the psychology of indebted clients.

Swart’s views are echoed by Benay Sager, chief operating officer of debt counselling firm DebtBusters, who says that the ‘debt persona’ of an individual has a lot to do with how they ended up in debt, how deep they’ve sunk into debt and how quickly they can get themselves out of that hole.

“Most of us have debt of some kind, ranging from home loans to credit card debt. According to the South African Reserve Bank, every South African spends around 12% of his/her net income repaying debt each month. However, this is just an average and a growing number are becoming over-indebted – with monthly debt repayments greater than 30% of their net income. In fact, most of the people we sign up for debt counselling battle debt bills of more than 100% of their income,” he says.

Sager says research by DebtBusters shows that there are four ‘personas’ or personality types of indebted consumers:

• South Africans who were ‘born into debt’ and don’t necessarily understand the repercussions of being in constant debt. “When you’ve been surrounded by debt your whole life, it’s all you know, and you tend to literally dig one hole to fill another,” he says. These individuals are likely to have a poor understanding of financial matters.

• People who are the first in the family to obtain a tertiary education. There is usually a great sense of achievement and pride in the rest of the family, but the flip-side is that the educated person may then be responsible for the financial upkeep of the whole extended family. “Such individuals usually have access to a better salary, but they also often have a significant financial burden and accompanying debt levels.”

• Individuals who earn a decent salary, but they can’t say no to family and friends. They tend to succumb to the pressure of putting others first and, although they are financially literate, the accumulative costs, with their debt levels rising as living costs increase, makes them fall deeper into debt.

• South Africans with a good monthly income, but who are unprepared for unforeseen financial events, for example, retrenchment. “Although these individuals are usually financially literate, and are aware of the consequences of not having sufficient risk protection, they are often in denial – thinking potentially catastrophic financial events won’t happen to them.”

Sager and Swart share the view that financial planners should encourage clients to save at least some money every month while paying off debt. In this way, they can build up an emergency fund which may help prevent them from diving straight back into debt when something unforeseen happens.

Swart argues that there are psychological benefits to simultaneous saving and debt repayment in that it can be very comforting to know there is a cash reserve available when life happens.

He says a habit of continued and consistent saving may also help to change people’s mind set and attitude towards financial matters. “Apart from entrenching the savings habit, people get to experience the sense of achievement that comes with paying off debt and of having access to hard-earned savings.”