Spend wisely and avoid the debt trap

Hannes van den Berg, CEO of Momentum Consult.

South African consumers spend almost 75% of salaries on debt payment.

It is no secret that debt is a large contributor to people’s inability to save and acquire financial wellness. According to debt management firm Debt Rescue, South African consumers owe a huge portion of their monthly salaries to creditors, and spend close to 75% of their salaries towards paying off debt. Only 15% of South Africans can afford to comfortably retire, due to lack of proper retirement planning and saving. With financial planning, advice and solutions company Momentum Consult predicting a 7.5% repo increase in interest rates, as well as increased inflation to 6.5%, there hasn’t been a more appropriate time to review your finances.

According to Hannes van den Berg, CEO of Momentum Consult, “any person who does not complete and follow a budget or personal financial plan is susceptible to the debt trap. To keep these plans relevant to an individual’s needs, they need to be reviewed on a regular basis. Appropriate changes need to be implemented following annual or life-changing events, such as marriage or the birth of a child.”

There are a variety of warning signs to look out for to avoid heading towards the debt trap, including excessive spending patterns, consistently overdue account payments and a struggle to secure additional debt (having finance & HP applications declined) due to being over-committed.

Van den Berg highlights the four most common factors that impact debt levels in South Africa:

1. Lack of financial literacy – proper budgeting and financial planning knowledge leads to consumer not differentiating between needs and wants).

2. Spending patterns exceeding income – making purchases beyond your affordability range (E.g. keeping up with the Jones’, using credit card for wants and not needs).

3. Emergency & unplanned expenses – such as a new baby on the way or medical emergencies.

4. Survival – the cost of living exceeds income and getting into debt seems like the only solution (e.g. personal loans, unsecured loans as a short-term measure).

However, it is not all doom and gloom, and there are solutions to help consumers manage and even escape debt. Van den Berg advises that people need to “pay off debt with the highest interest rates first or consolidate debt, such as credit cards”. He further adds that those in debt should “scale down if your lifestyle is beyond your affordability and be realistic about needs versus wants. If there is no way out, see a registered debt counsellor or financial adviser, depending on what stage of debt cycle you are in or severity of debt.” The general principal of “pay yourself first” still applies here – this can take the form of ensuring you pay for your Life cover, disability, dread disease, medical aid & Retirement Annuity (RA). “Having a proper financial plan in place will ensure you find a balance between ensuring quality of general living and paying off debt,” states van den Berg.

Debt is a part of so many of our lifestyles, and it can be difficult to navigate without it. There are certain debts, such as assets, that are acceptable. This includes home loans, however, “one’s bond repayment must be aligned with affordability, taking into account current and future repayments, such as rising interest rates that will push up repayment figures,” states van den Berg. Other acceptable debts include student loans to ensure future income, as well as big ticket necessary items such as car repayments. But this of course is dependent on each person’s unique circumstances, so it is critical to see a financial adviser and have a financial needs analysis (FNA) done.