Don’t let festive spirit leave a debt hangover
The festive season is looming, and despite tough economic times, many South Africans will celebrate with some retail therapy – spending.
It’s natural to want to splurge a bit, especially if you get a bonus or a 13th cheque, but the advertising, special offers and general “let’s live a little” or “buy now and pay in February 2012” mood can derail consumers’ efforts to curb their spending and debt.
That could leave many families facing a debt nightmare by the New Year, right at the time many have expenses such as school fees and school uniforms. At best, they will have to severely cut back on their lifestyle to pay off what they owe and at worst they may face repossessions and blacklisting.
John Manyike, head of financial education at Old Mutual, says: “Holidays are enjoyable and often well deserved, but also bring a huge risk of overspending. We all like to spoil ourselves and our families, but too often that leads to debt and hardship. Many consumers generally complain about January being the worst month in the calendar due to zero bank balances, a pain associated with impulsive festive spending and a debt hangover. Good budgeting is essential to avoid that.”
Manyike suggests the following steps to avoid a debt nightmare in January 2012 and beyond.
Face your fears
• Find out where you are now financially by writing down what you earn, owe and spend. In our digital age money can seem unreal, just a swipe here and there and a number on an LCD screen. So the simple act of writing down what comes in and what goes out helps to bring you face-to-face with reality.
Fixed expenses
•Start by writing down your fixed expenses or the things that stay the same every month. Typically these are rent, bond repayments and insurance premiums.
Variable Expenses
•Below these, jot down your variable expenses such as food, transport, rates, 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 on average per month. Above all be honest. By underestimating these costs you’re only fooling yourself.
Irregular or ad hoc expenses
•Write down your irregular or ad hoc expenses. These are things such as car maintenance, computer repairs, home repairs and so on. Try to come up with an average monthly cost. Again, if in doubt, it’s better to slightly overestimate than get caught short.
Add up and adjust
•Now for the really important part: add them all together. If they exceed what you’re earning, you’re already in trouble. And if they’re close, with the rising petrol priceand fluctuating interest rates, it could be just a matter of time. Therefore, make the necessary adjustments by reducing spending and setting new budget limits. Do this exercise before you go on a holiday to make surethat you can afford it. If you can, set budget limits for the holiday together as a family.
Charge down the debt monster
Tackle the debt monster before you become lenient to the festive spending.
Prioritise
•Start by prioritising your expenses in order of importance. You need to pay a bond or rent, you need transport and you have to eat. When it comes to things like clothing and entertainment, ask yourself whether each expense is really necessary - and if it’s not, try to eliminate or reduce it.
Pay off debt first
•Use whatever money you free up this way to pay off debts. Start with the ones 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 of new debt.
•You should also speak to your financial advisor. You may be able to reduce your monthly repayments by consolidating some payments such as clothing accounts and other loans. This way you also reduce multiple admin fees. But remember, it is not a good idea to consolidate short-term debt over a long period.
Emergency fund
•Plan ahead. Set up some sort of emergency fund to deal with unexpected expenses. As a rule of thumb this should be about the equivalent of a month’s salary. You’ll be amazed how much peace-of-mind it will give you.
Start a savings habit
•Next, think about investing some money to reach your financial goals; ideally between 10 - 15% 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 working out a financial plan, your financial adviser should be able to help you.
•Once your finances are fully sorted, you can budget a little money each month to congratulate yourself.
•Importantly, empower yourself with knowledge: Old Mutual’s free On the Money programme helpsyou develop planned, clear and specific short, medium and long term visions that are realistic, achievable and inspiring.
•The programme shows how South Africa’s Big Five animals’ habits can help us develop good financial principles.
