How to manage your debt in the New YearBy Danielle van Wyk
With the festivities behind us and the resumption of everyday living, one’s body and more so pocket, is beginning to feel the strain, as financial commitments come knocking and the rand dives. Justmoney explores the ways in which you can manage your debt in the New Year.
Niel Fourie, Public Policy Actuary at the Actuarial Society of South Africa (ASISA), says:“South Africa ended 2015 on a low, with the Rand weakening to historic levels against the dollar and other major currencies, a drought that crippled much of the agricultural sector and the downgrade of SA’s credit rating to just one level above junk.
“As a result food prices are expected to increase by double-digit figures this year. In addition, a dramatically weakened Rand has pushed up the cost of imported goods by significant margins.
Experts also forecast substantially higher electricity and water prices in the year ahead, the consumer price index (CPI) is expected to rise considerably and many medical aid scheme contribution increases are also in the double digits.”
Fourie went further in saying that these ripple effects will reduce your disposable income in 2016. In addition, “several sectors are facing retrenchments as part of cost cutting initiatives, which will result in job losses.”
Chris Labuschagne, CEO of FNB Credit Card (First National Bank), suggests keeping track of your money. “Without scrutinising your income and expenses, there is no way to really understand if you are able to make your monthly payments, and most importantly where you can cut down. Make sure that the money that goes out of your account at the end of the month, is less than your income.”
To assist you in navigating through the tough financial period we are in for, Fourie provides the following advice:
Drawing up a budget:
“According to the National Credit Regulator (NCR), of the more than 23 million credit active consumers in South Africa as at June 2015, close to 11 million had impaired credit records or had failed to make debt repayments. This is a worrying sign that many South Africans continue to spend beyond their means,” states Fourie.
In addition to the trend, in many of these cases the reason was simply a lack of financial consciousness. This is often due to the individual failing to have a budget in place.
He further highlights that the first step to taking control of your budget and spending may be to cut up unnecessary credit cards and close store accounts, or assess which of the other luxuries you can scale back on. You may also need to be realistic and carefully assess the financial implications of a new car.
Fourie explains that 2016 should definitely be focused on cutting unnecessary expenses such as “cigarettes, subscriptions that you do not really need and extravagant spending such as eating out.”
Asking yourself whether what you are buying is a need or a want could be a useful tool in the process of budgeting.
Prioritise the payment of debt:
“Towards the end of 2015, the South African Reserve Bank (SARB) raised the interest rate by 0.25%. As a result the banks’ prime lending rate increased to 9.75% and debt has become more expensive. Economists anticipate a further increase this year,” explains Fourie.
As one’s budget is spread thinly, it is imperative that you begin with paying off your debts, so that you avoid incurring additional charges and stay on course in your goal of becoming debt-free.
He recommends listing all your debts in order of priority. “You can then put any extra money you can muster into paying off high-interest debts while making minimum repayments on debts with lower interest rates and gradually work your way down your list.”
While having high debts to pay off, Fourie in addition advises against increasing your investments, “The reality is that you are unlikely to earn returns on bank deposits and investments that exceed the interest rates charged by your debt accounts.”
Plan for the future:
In order to maintain financial discipline, Fourie suggests setting out clear goals to keep in mind.
“Putting goals in place such as saving towards a child’s education, a home or retirement will help you stay focussed and prevent you from being tempted off your path by unnecessary spending,” Fourie says.
This will further enable you to tailor your ‘specific investment products’ to best suit your financial journey. It is also always better to consult a qualified financial advisor to assist you with the structuring and planning of your finances, thus also making yourself accountable to another individual.
‘’Psychologically, you will also be more likely to remain disciplined if you automate your savings and investments to occur as soon as you receive your salary rather than if you attempt to save any amounts left in your bank account at the end of the month,” he pointed out.
Another way in which to cut costs, is by cutting expenses such as making an effort not to use excessive water and electricity, to car-pooling to save on travel and fuel costs.
“Make sure that every rand you spend in the next few months is necessary. Proactively plan your shopping by drawing up a shopping list, this will help you avoid unplanned spend,” suggests Labuschagne.
Remaining in communication with your bank is also an essential. “They can assist you to restructure your debt, before you are forced to do so by collectors and attorneys, resulting in you having a bad credit record. The bank may be able to assist you by putting your credit card repayments on a budget plan, or relooking at the terms of your personal loan, they may even be able to assist with a payment holiday on your bond if you really find you are in trouble,” Labuschagne adds.
Times are increasingly tougher for South Africans and with monies already stretched it is vital that you take immediate control of your financial situation to avoid falling into hardship, stresses Fourie.