Debt! As the saying goes ‘Ain’t nobody got time for that!’

I often find myself in front of clients who are unable to begin saving due to their levels of debt. Disposable income is a luxury and as quickly as their salary is paid into their bank account it is transferred out.

Debt can put a huge amount of strain on a person, both financially and emotionally, and on top of that it prevents them from achieving their financial goals – both in the short-term and long-term. The FPI MyMoney123 ® initiative has been quoted as saying that high levels of personal debt will obstruct any goals, ambitions or plans that clients may have for the future.

Statistics from the National Credit Regulator show that just over 9 million credit-active consumers are struggling with bad debt. With 20 million credit-active consumers in South Africa, this is a scary reality.

So what is ‘good’ debt and ‘bad’ debt, and why is it important to distinguish between the two?

Good debt, if used correctly, should enable you to generate income from your assets. Examples of ‘good’ debts are a bond on a property, a student loan or small business loans. As you can see from the examples a ‘good’ debt is not easy to obtain and often requires a lengthy application process.

‘Bad’ debt and the kinds to avoid are debts acquired to purchase items that depreciate in value very quickly. Examples here are your credit cards (one as an emergency facility is all you need), store cards and personal loans, to name a few. ‘Bad’ debts are very easy to obtain and because of the high interest rates are not always easy to get rid of.

Unfortunately most people in South Africa find debt to be unavoidable and it is often their only option to get ahead in life. So how do we get to grips with this potentially paralysing facility?

Here are some tips on how to manage your debt levels:

•    Plan for your purchase if possible. This will allow you the opportunity to save for it as opposed to putting it on credit

•    Keep a record of all your outstanding debt in a debt schedule. This will ensure you are keeping track of:

- The balance of your debt
- Your monthly repayments
- The term left to pay off the debt
- The interest you are being charged

- Try paying off the smallest debt first as opposed to the debt that attracts the highest interest. Once you have paid off this debt you can contribute what you were previously paying to the minimum repayment on the next liability.

•    Budget! Maintaining a monthly budget will allow you to identify wasteful spending which you can free up and use to pay off your debt.

•    Avoid taking on more debt to pay off existing debt – this just puts you under more financial strain

So, if you’re considering purchasing on credit, ask yourself – is this item likely to increase in value or generate an income? If the answer is no, try avoid going into debt to purchase it.

*** Consolidated is a national financial planning practice with offices in Western Cape, Johannesburg, Tshwane, Eastern Cape and KwaZulu-Natal .Charlene Irwin is based in Johannesburg.

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