Debt is something most people find themselves incurring! And it’s not difficult to understand how one gets into debt. We have such easy access to credit cards; retail accounts for furniture, clothing, appliances etc… and regular offers to apply for small loans. Have you noticed that you may even qualify for a loan without having applied for one?!
This type of easy debt can be dangerous. Before you know it you are paying off more than one account, every month, and with no-end in sight! And why does the debt seem never-ending…quite simply because it’s spurred on by many possible factors – the compulsion to buy; a habit (have to have another pair of shoes); poor personal financial planning; or the buy-now-pay-later syndrome (which is possibly the biggest culprit of debt). The reasons for debt range from greed right to having the misfortune of an unexpected crisis and/or event. And there you have it – you are in DEBT – and debt has to be repaid back!
Therefore, not only are you stuck with owing the outstanding amount; you also have interest charged on the outstanding amount. And the longer it takes you to pay your debt back, the more interest you are paying.
Have you ever calculated what that article purchased on credit actually cost you?
As an example you buy a large appliance (i.e. TV) for R3999. You decide to pay it off and your repayments are R290 per month over 24 months. The total amount you have repaid R290 x 24 = R6960. You are paying 174% more for the TV! Did you consider maybe getting a second-hand one rather, or seeing if someone has a spare one to lend you until you can afford it, or seeing if you can buy it cheaper somewhere else. Do you need the new TV or is it simply nicer than the one you already have?
Be careful – easy debt is easy to accumulate and easy to obtain!!
Debt that may be harder to obtain is debt for larger loans! For example if you want to purchase property. You will require certain criteria to qualify for these loans and your repayments will typically be over a longer period. Provided you are in a position to afford the repayments, here your debt can assist you to grow your asset. For example, you purchase a property for R600 000 and the interest you owe on the loan + purchasing expenses work out to R250 000. After 10 years, you sell the property for R950 000. Therefore R950 minus R850 = R100 000 profit.
Whether you have long term debt, or short term debt, or both – one needs to have an understanding and grasp of what one owes.
How much do I owe, to whom, for how long, what interest am I paying?
Have you considered approaching your Bank to discuss your debt? Negotiating a better interest rate, shorter repayment term, a higher repayment every month?
If you are going to use the services of a Debt Counsellors, ensure they are registered.
The objective of getting a handle on one’s debt is so that one can work towards (a) reducing debt and (b) free up cash to save! Some of the reasons one needs to save are:
- For emergencies and unforeseen events
- For Retirement (to receive income when one retires)
- For Children Education (forward planning)
- For Insurance (mitigate risks)
- For Holidays
Seek helpful outcomes and plans to reduce your debt and increase your savings!
As Warren Buffett said “Do not save what is left after spending, but spend what is left after saving”
Elena Bevilacqua CFP® Professional, Edge Financial Group (FSP 7892), Century City
Elena Bevilacqua CFP® Professional
Senior Financial Planner
BCom Hon: Financial Management
EDGE FINANCIAL GROUP
Tel: (021) 555 0839Read More