By :Sydney Sekese, CFP® professional and member of the Financial Planning Institute
South Africa conventionally celebrates Spring Day on September 1 each year. I am dedicating this article to the arrival of this season. A famous grandma’s quote states that “A cold and rainy winter does not last forever. Summer eventually follows and life tends to flourish then; but that does not help us know when the last winter storm will come through”.
I would like to adopt the above quote and challenge readers to think about sanitising their finances this month and beyond. By doing this, they will be reducing potential impacts resulting from improper financial habits of the past and safeguarding their future.
The spring is a great time to get rid of things that no longer serve you, and your bad spending habits are no exception. Take this time to look over your spending and determine bad habits that are detrimental to your finances. For example, do you always go shopping on Saturdays or do you eat out with friends on Thursday nights?
While looking over your spending habits, you will likely find patterns that indicate how you spend your money, both good and bad. It is a great time to target one you want to change.
Your debt is a great place to start when it comes to cleaning up your finances. Sometimes debt is our only hope in a difficult situation. When debt is used intentionally, it can be a wonderful resource. The current pandemic could have resulted in increased debt exposure. Perhaps debt has carried you through a difficult period during lockdown. This month could be spent on retrospections and assessing a healthy amount of debt and those debts that are out of control.
There are practical tips you can consider to address the debt backlog. Detailed below are some of the possible approaches to sanitise your debt situation:
Tip 1: Assess your total debt exposure
You need to start with a clear picture of the money you owe. Write down how many more months of outstanding payments you have. Don’t add them all together just yet. Take one unpleasant bite at a time.
Tip 2: Have a conversation with those you owe
We have recently experienced many banks offering payment holidays to help desperate South Africans navigate this crisis. You can also negotiate repayment terms with smaller institutions like your doctor’s practice or your child’s school.
Rate your debt by flexibility on a scale from one to three. Debts with no room for negotiation, like micro loans, would get a rating of one. Debts that you might pay off later or in smaller instalments, like an outstanding amount at the pharmacy, gets a rating of three.
Tip 3: Write down what you can afford
If you’re feeling overwhelmed by your debt, it’s probably because your monthly repayments are higher than you can afford to repay in a month.
Write down how much money you can realistically pay towards your debts every month. Add up your minimum repayments. Deduct what you can afford from your minimum repayments due. By doing this you will be able to negotiate on a realistic and sound basis.
Is there good and bad debt?
If you use debt as a part of your bigger wealth creation strategy, it will increase your level of credit worthiness. For example, good debt would be when you take out a bond in order to buy a house, because in the long run you will save on rent and you will have a good asset that hopefully increases in value over time. Depending on the purpose, a personal loan could also qualify as a good debt, if for example it is used for as a study loan. If this personal loan is for an overseas trip, then it’s a bad debt.
It is prudent to set up a debt payment plan today and reduce your debt to manageable levels. You may not be able to pay everything off this spring, but when you set up a plan you are taking the first step to make lasting changes with your situation. Your future will thank you for the first step you took this spring.