The Finance Series for Millennials: #3 Debt and what to do with it

-By Thiart van der Merwe

 

 

In this series of articles, we’re giving you the advice you need on how to set yourself up for financial freedom. Our aim is to give you practical steps each month – action points that you can take immediately. Follow these steps over the course of the series and you will be on the road to financial wellness.

Our third article focuses on debt.

Can you relate to this scenario: You start your working career and it’s not long before you get offered a flashy credit card, clothing accounts (with R500 free clothes if you sign up), and an overdraft facility on your current account? Before you know it, you’re in over your head paying off interest for things you can’t remember buying.

So now what?

Here are some action points to get you debt free:

Understand that there are various types of debt, some good and some bad. Applying for a bond to purchase a house can be considered good debt. Applying for a credit card because “there are just too many days in this month” – not good debt. We have all been coaxed into getting a credit card, clothing account/s or an overdraft with interest free terms and “low” interest rates. The biggest challenge is getting ourselves out of this web.

Most of these offerings I’ve mentioned will have a set period in which you don’t pay interest. A credit card would usually give you a 55-day period to pay back the money spent before charging interest. Some people are diligent enough to stick to that payback period, but most of us aren’t and so we end up paying interest on things we consumed months ago. This added expense to our monthly bills means we fall behind on payments and eventually live close to our maximum credit limit and fall victim to credit.

Most of these credit facilities will charge in excess of 20% in interest. An outstanding amount of R10 000 will cost you R2 000 a year in interest.

The steps to get debt free are not easy: You will need to force yourself to pay off all credit lines and then close these accounts after doing so. Do not leave them open for future potential spend.

The ideal strategy would be to rank the debt by the rate charged and start paying off the one with the highest interest rate. Economically speaking that makes the most sense. For some of you, I’d suggest a different scenario:  Rank your debt from smallest to largest and start paying off the smallest one first until you are done. Proceed to close that account. Psychologically, every debt paid off will feel like a victory and keep you going.

There will always be emergency expenses creeping in and hindering the progress. My suggestion would be to keep a balance available on your credit card for unexpected expenses, I am referring to home appliances breaking, car services etc. – not a last round of late night drinks for everyone in the bar. Once your debt is serviced you need to put money away for emergencies – ideally outside of your current account. You can use a savings pocket or an account that you have immediate access to. When you have enough in this account, cancel that credit card.

The single biggest piece of advice that I can give you is: DO NOT USE CREDIT IN ANY SHAPE OR FORM TO SUSTAIN A LIFESTYLE YOUR SALARY CANNOT SUPPORT. If you want to go on a holiday, save up for it and have cash on hand. Lifestyle spending is the reason people are indebted forever with a feeling that they will never escape it. Only use debt for emergencies and buying assets and you will reap the reward in the long run.

I’ll leave you with something to ponder: Today, there are three kinds of people:  the have’s, the have-not’s, and the have-not-paid-for-what-they-have’s. Don’t try and keep up with anyone else to your own detriment.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

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