According to Dave Ramsey, an American financial advice enthusiast, “A budget is telling your money where to go instead of wondering where it went’’. In order to achieve financial freedom, successful planning, budgeting and spend tracking is required. Without implementing an appropriate budgeting and saving strategy, your risk of financial failure increases.
21 August 2015
Many South Africans anxiously await the start of spring and the renewed energy that accompanies it. However, when it comes to personal finances, the time to act is now. While the weather may be improving, the South African economy and financial situation of many South Africans is getting gloomier by the day.
The announcement from the South African Reserve Bank (SARB) last month that it will hike rates by 25 basis points was possibly just the beginning of a series of hikes still to come. It was the first time that the SARB increased the repo rate since July 2014 and this trend is expected to continue for at least the next 18 months until inflation is back under control. With the next repo rate announcement to be made in September, now is the time to start spring cleaning your finances!
Wendy Monkley, Head of Marketing at Debt Management Company DebtBusters, is of the opinion that more and more consumers are to have adverse credit standings. “We started seeing this trend in March already when the Credit Bureau Monitor reported a quarter-on-quarter increase in the number of consumers with impaired credit records, rising from 10.26m in Q4 2014 to 10.41m in Q1 2015. With a possible further increase in the repo rate anticipated next month, we can expect this trend to continue”, says Monkley.
The latest Consumer Bureau Monitor report indicated that only 42% of all credit active consumers in South Africa are up to date with their accounts, leaving a staggering 58% of credit active consumers behind on their account payments, 22.4% of which are 3 or more months in arrears.
Source: Credit Bureau Monitor, Q1 2015.
“South Africans in general are experiencing a heavy burden with their cash flow due to increases in electricity, food and other living expenses, leaving little or no money for servicing their debt. Consumers that have started to fall into the trap of ‘robbing Peter to pay Paul’ or are having to cancel policies to improve cash flow at the end of each month, are likely to be over-indebted. With the repo rate announcement around the corner and the possibility of another rate hike in September, sorting out finances should be at the top of consumers priorities”, says Monkley.
DebtBusters offers these tips on how to spring clean your finances
- The best and most effective way for you prepare if you are already struggling with debt is with a credit report. Understanding your debt situation, who you owe and how much you owe, forces you to stop and acknowledge your debt.
- You then need to prepare a realistic budget whereby you list your living expenses first, and then your debt repayments.
- Identify ways to cut back on non-essentials such as DSTV, private schooling and holidays. These luxury choices should never take priority over retaining medical aid and life insurance for example. It is important to understand the importance of keeping your risks covered to avoid exposing yourself even further to financial risk.
- Start prioritising paying off debt as quickly as possible. By prioritising debt repayments you can improve your cash flow and avoid having to take out more credit to survive.
- Use any additional income, such as tax rebates and bonuses to settle debt, is a great way of alleviating and overcoming your debt quicker!
- You should settle small balances first in order to get as many accounts paid off as possible. The surplus money you save from these monthly repayments should then be allocated towards other bigger accounts, so that you can pay them off faster.
- Once small balance accounts are settled, you can settle expensive, high interest debt next. Credit obligations, mainly short term credit and maxed out credit cards, are usually the most expensive types of debt.
- It is advised that you pay off your most expensive debt first. It will save you money over the longer term, as you will be paying less interest and more capital.
- If however, once you have done your budget and removed unnecessary expenses, you do not have enough money to service your debt, then you may be over-indebted and you need to speak to a Debt Counsellor like DebtBusters to consolidate your debt, reduce monthly payments and extend payment terms. Debt Counselling will protect you from legal action and give you peace of mind.