Overthrow debt and achieve financial freedom

South Africans should harness the spirit of the liberation struggle to ensure real social development and economic growth, rather than falling prey to new forms of economic oppression, says Thembisa Mapukata, marketing executive at Old Mutual. She poin

“We South Africans must apply the lessons of our political history to our new socio-economic reality. We rose up, for instance, to reject the indignity of the Pass Laws. It would be tragic ifwe replaced the indignity of political oppression, unemployment and generational poverty with crushing debt due to our ownpoor financial choices."

Debt undermines freedom

Ms Mapukata adds: “Unless it’s controlled, short-term debt can lead to repossessions, blacklisting, hardship, stress and social problems, but it also has long-term impacts o­n breadwinners’ families, such as harming their education opportunities.

“Human Rights Month is an appropriate time to reflect not o­nly o­n how to deepen democracy and people’s Constitutional rights, but also to find ways to capitalise o­n the opportunities our freedom gave us.” Ms Mapukata explains that many young people have adopted a “borrow to spend” mentality, as they see themselves as spenders and not savers, which unfortunately leads to debt and poor savings habits.

She notes that the Old Mutual Savings and Investment Monitor, as well as other studies such as the Credit Bureau Monitor of the National Credit Regulator (NCR), show that nearly half of the country’s 19 million credit-active consumers have impaired credit records.

“Despite interest rates being at their lowest in years, South Africa’s debt-to-income ratio is 78.5%. This means that for every R100 a household earns, R78.50 goes towards servicing debt.

“Many young people today take jobs with salaries far higher than their parents could have imagined possible. They begin to live lifestyles which they believe fit that income. Many realise too late that even a good income can’t keep pace with reckless spending.

“South Africans must be empowered to be financially secure and debt-free, starting with the basics of budgeting and saving for your retirement and other future needs. This may require a long, hard look at your finances and your lifestyle.”

Take these three steps towards your personal economic freedom, she says:

1. Reality check
•Find out what your financial situation is. Write down what you spend. In our digital age, money can seem unreal – just a swipe of your plastic here and there. Writing down what comes in and what goes out makes it far more tangible.
•Start by writing down your fixed expenses or the things that stay the same every month. Typically these are rent, bond repayments, car repayments and insurance premiums.
•Below these jot down your variable expenses such as food, transport, electricity, water, cellphone and similar costs. Include items such as entertainment and clothing. If you’re paying for these o­n a credit or shopping card, use the statements to help you work out what you spend. Be honest. If you underestimate these costs you’re o­nly fooling yourself.
•Write down your irregular expenses. These are things such as car maintenance, computer repairs, household repairs and so o­n. Try to estimate an average monthly cost. Again, if in doubt, it’s better to slightly overestimate than get caught short.
•If your expenses exceed your earnings, you’re already in trouble. And if they’re close, it could just be a matter of time before you’re in the red.

2.Tackle the obstacles
•List your expenses in order of importance. Ask yourself whether an expense is a need or a want. If it’s not really necessary, see if you can reduce or eliminate it. Typically these will be things such as entertainment and clothing.
•Repay your debt, ideally with the money you’ve saved by cutting back o­n unnecessary expenses. Start by repaying those that attract the highest interest such as shopping cards and credit cards. Of course this will o­nly work if you don’t rack up a whole lot more debt o­nce you’ve paid these off.
•Speak to your bank about consolidating some payments such as your bond and car finance at a better rate of interest to reduce your monthly repayments. But remember, it’s not a good idea to consolidate short-term debt over a long period.

3.Carve out your destiny
•Once you’re out of debt and back in the black, you need to plan your financial future. Establish an emergency fund to deal with unexpected expenses. This should be about the equivalent of a month’s salary. You’ll be amazed how much peace-of-mind this will give you.
•Next, aim to invest some money to reach your financial goals: ideally about 12% of your net income each month. This is over and above what you should be saving for retirement through your company pension scheme or your own retirement investments. If you’re unsure or need some help to work out a financial plan, a financial adviser should be able to help you.
•When your finances are fully under control, budget a little money each month to celebrate.
•Importantly, empower yourself with knowledge: Old Mutual’s free O­n the Money programme can help you develop good financial principles. By using the habits of South Africa’s Big Five animals as examples, the programme helps you to draw up clear and specific plans that are realistic and achievable. For instance, the secret of the lion is to eat first – to pay yourself by saving a set amount each month before your salary is gobbled up by expenses.