The festive season has come and gone, leaving behind treasured memories but for many a lot of debt. An FNB survey showed that consumers spend up to 20% more money during the festive season.
After the spending and the holidays are over how do you start getting your finances back on track for 2014? What should you avoid doing this month to ensure that your money goes further? We spoke to the experts on how you can get out of debt racked up from 2013’s holiday season.
The debt trap
Alec Martin, financial consultant at Debtbusters, says that during the festive season many people accumulate debt due to excessive spending on food, parties, restaurants and presents. More fuel is also consumed during the vacation for family holiday trips.
Eunice Sibiya, head of FNB consumer education, warns that South Africans will have a long wait ahead for salaries at month-end and overspending during the festive season could lead to borrowing to cover shortfalls which may quickly snowball into a bigger problem.
“Many people think that borrowing money to help them get through the first few months of the year will be a quick fix solution. However, taking out a loan or using credit cards to help cover short-term expenses can escalate into a big financial problem and may even result in being blacklisted if not managed properly,” says Sibiya.
She adds that if, for example, you have R10, 000 worth of debt on a store card and the annual interest is 22%, you will be paying off R183 a month just in interest without making a dent in the actual amount you owe.
“This money could rather have been used to save for your children’s education, to pay off your home loan quicker, or even treat yourself to something that month,” says Sibiya.
Martin adds that unsecured lending and micro-loans are the biggest culprits that lead to consumers accruing more debt due to the high interest charged on these loans.
“The worst type of lending is the pay-day loans. At the end of the month consumers will have to pay the full amount plus a high interest on this initial loan. This type of lending is not sustainable and often leads to a debt cycle,” says Martin.
Sibiya adds that an additional problem is that people stop paying for policies and long-term investments in order to service their debt, which impacts their financial future.
Take back your financial control
Experts say the first step is to stop increasing debt as this will allow you to focus on paying off your current commitments.
“Be responsible for your own finances. Write down every expense for the month, including groceries, clothing, electricity, rent or bond and credit card repayments. Once this has been done you will quickly see that there is space to cut down on spending and clear your debt,” says Sibiya.
Stick to your new year’s resolution budget
January is the time when you need to be most strict when it comes to your budget. “After the festive season you need to nail down what you spend and stick to it. The excess spending you did in December like eating out and big parties should be kept to a minimum. Cutting down on subscriptions like DStv, at least for a few months, will also help,” says Martin.
Consider paying off the smallest debt first
Louise van der Merwe, financial planner at Wealthup, says mathematically, it makes senses to pay off the debt with the highest interest first as you will end up saving the most. But the psychological effect of reaching your first goal may help you stick to your plan for much longer.
“Start with paying off the smallest debt first. This will help you stay motivated and fuel you towards reaching the other goals on your list,” says Van der Merwe.
Share your financial goals with your family
Van der Merwe says your family might not understand why you are cutting down on certain expenses or why they cannot have the latest toys. “Share your financial objectives with your family. This is also a perfect opportunity for your children to learn to budget and spend their pocket money wisely,” he adds.