If consumers do not reduce their levels of debt, improve their money management skills, and try to put aside money for emergencies, education, retirement and other important items, the savings ratio in South Africa will not improve.
An analysis of the income and expenses of consumers by the National Debt Mediation Association (NDMA) shows that it is possible, with discipline and adjustments to the budget by cutting out unnecessary expenses, for some consumers to afford their living expenses, repay their debts and save.
This, however, takes commitment and perseverance. Unfortunately this is not the case for many consumers whose budget deficit is such that the only option is to negotiate the reduction of their monthly debt repayment obligations or for them to undergo debt counselling. There is a sizeable chunk of consumers whose debt levels are so high that even a reduction in monthly obligations does not assist in addressing the debt-stress. This is the case with consumers whose income has reduced due to divorce, retrenchment, unemployment or the failure of a business venture.
If consumers do not reduce their levels of debt, improve their money management skills, and try to put aside money for emergencies, education, retirement, the savings ratio in SA will not improve.
While it’s difficult to even think about saving when salaries are being frozen, workers are being retrenched, and costs such as food, electricity and petrol just keep going up, now is the time to be sharp with less cash.
“When times are tough, it’s more important than ever to make sure you’re tightening your belt and saving, as you’ll need it for tomorrow,” says NDMA CEO, Magauta Mphahlele.
“Ideally you should be saving between 10 and 15% of your income and putting it in different types of saving and investment products based on your short- and long-term needs and goals,” says Mphahlele. She adds that by putting away money each month, you’ll also be building the discipline needed to save.
“Even better, use a direct debit that goes straight into a savings fund so you don’t even miss the money,” she adds. “What you don’t see, you won’t spend.”
Build up an emergency fund
Unforeseen expenses, such as the costs of an accident or medical emergency, can set you back financially, in the worst case forcing you to take out a loan to cover the expenses. “You want to build up an emergency fund over time to use in cases such as these,” she says.
You should put an amount into an account that is not necessarily your day-to-day account, but which you can access at short notice. You could also use these savings to cover day-to-day living expenses should you lose your job.
“If you’re retrenched, you want to be able to cover your living costs, including repayments on debts such as your home loan, so ensure that you have suitable and reasonable insurance cover which includes credit life insurance. Shop around for the best policy in terms of cost and type of cover,” says Mphahlele.
Don’t be tempted to dip into your emergency fund for “I want” expenses like shoes, clothes or a night out.
Pay off your debt first
In order to be able to save, you need to try to pay off your debt first. There’s little point in paying high interest rates on your borrowings while trying to save. “But it doesn’t have to be an either-or situation,” says Mphahlele. “For instance, you could be setting aside money each month to pay off your home loan, while also contributing to a retirement annuity.”
Pay all your debts on time to avoid penalties and a negative credit record. Pay more than the required instalment on all your debts and if you want to reduce your debt levels.Tackle the debt with the highest interest rate payments first – usually credit and store cards or personal loans, and then longer-term loans, such as car and home loans.
Should you be struggling with debt repayments, do not wait for the arrears to build up before you approach your creditors. It is difficult to negotiate if legal action has already commenced.
One of the main reasons people battle to save money is that they can’t or won’t change their spending habits. It’s a bit like dieting – cutting back on electricity usage, ditching the expensive cell phone, using discount coupons at the supermarket or resisting buying that pair of designer shoes are all simple ways to save.
“It’s as simple as making sure that your income covers your expenses,” says Mphahlele. “If you can’t afford to pay for it without borrowing, you probably don’t need it.” Saving up to buy that new TV or lounge suite rather than taking out expensive credit, is not only financially clever, it can be a truly satisfying purchasing experience too.
Pay attention to detail
Often you can save simply by being more diligent with your paperwork. By going through your bank account each month, you may pick up incorrect payments or unnecessary fees. Keep all paperwork on file so you can compare your expenses and income month-to-month and have a track record should something go wrong.
“Do your research and compare different products for the best deal,” says Mphahlele. “Whether it’s cell phone costs, bank fees or non-interest-bearing clothing accounts, hunt for the best deal.”
Neil Roets, CEO of Debt Rescue, said there is a dramatic growth in the number of people who are seeking protection from their creditors by going under debt review. There has also been a significant growth in the number of consumers who are having their salaries docked by garnishee orders and who are being blacklisted because of judgements against them.
“We are experiencing double-digit growth in our own client list and we know from colleagues in the debt counselling industry that they too are seeing rapid growth in the number of distressed consumers seeking help,” Roets said.
“It’s a well-known fact that almost half of all credit-active consumers in South Africa have impaired credit records. In other words, about nine million consumers are in arrears (by three or more months) on at least one account, or have a debt judgment or administration order to their names,” Roets said.
Every person who has an account anywhere in South Africa with a credit or service provider, who makes use of credit bureau services, will find the information about the account is recorded with a credit bureau, irrespective of whether the account is paid regularly or not.
The purpose of listing the information collectively at the credit bureau is to create a comprehensive view of the consumer for both prospective and existing credit and service suppliers. This assists them in evaluating credit or account applications and in the management of their relationship with their customers.
In South Africa, there are 13 credit bureaux that are registered with the National Credit Regulator (NCR). According to the National Credit Act (NCA), consumers are allowed to receive one free credit report once a year from a registered credit bureau. “Should a consumer require an additional copy of their credit report within the same year, they will be charged a fee which may not exceed R20,” said Mpho Ramapala, Manager of the Education & Communications Department at the NCR.
The NCA also specifies that consumers have a right to challenge information which they deem incorrect from their credit reports, although this is not universally known or acted upon. Ramapala encourages consumers to exercise this right.
"Credit reports also include consumers’ payment profiles which contain factual information that relates to the payment profile of a consumer.”