How to avoid the debt spiral

Maya Fisher-French
2018-11-11 12:25
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Couple managing the debt Trying to manage your debt can be quite frustrating especially if you haven't planned correctly. But it can be done. Picture: iStock

There are four main reasons our Money Makeover candidates ended up in debt: using credit lines to fund lifestyles, demands by family, unexpected emergencies and poor investment decisions. Yet all of these came down to the same problem – a lack of planning.

By planning for an event, you are able to save towards the goal, earning interest and thereby reducing the time it takes you to have the funds available. If you only respond to financial events by borrowing money, you end up paying interest to a credit provider and taking far longer and spending more to pay off that debt. So, while planning and budgeting may feel like a hassle, every hour you spend preparing will save you money.

Three anti-debt rules to live by
  • Avoid credit cards and overdraft facilities for day-to-day spending
  • Have an emergency fund. Start with R10 000 and build up to three months of expenses
  • Set limits with your family as to how much you can support them, and include this in your budget
If you reach a stage where you are struggling to repay your debt, contact your credit providers immediately. It is a lot easier to negotiate a repayment plan when you are still on good payment terms than trying to come to an agreement when you are months behind and the debt is mounting.

Funding lifestyle

With proper planning, we can find ways to avoid taking on debt, but it also takes self-discipline as it’s so tempting to access money to get what we want immediately.

Financial controller Samke (26) speaks about her journey into increasing indebtedness: “I ended up in debt because I wanted more money. One of the things I could have done better was to plan. I always used to commit myself to stuff without proper planning. I was always a ‘yes’ person and, when my salary could not cover my commitments, I would apply for a loan because I don’t like to disappoint people around me.”

Read more about Samke's financial journey here

For environmental affairs officer and single mom Nkosi, her debt journey was also a matter of not managing her finances every month: “I did not have a strict budget, so ended up buying things that were unnecessary; I did not know the difference between a need and a want. As a result, I acquired a lot of debt.”

How to plan

You have to know how much you are earning and how much you are spending every month. Start an emergency fund and add it to your budget so you are ready for unexpected expenses.

Funding family and education

Municipality fieldworker Bafo took on multiple loans for his family.

As the only person working in his family, he built his parents a home with a personal loan. He was then responsible for his sister, who was still studying, and borrowed money to fund her education. He also decided to continue his studies to get a B-tech in agricultural management at Nelson Mandela University. His final loan came when he needed to buy a car for work.

Read more about Bafo's financial journey here

While he was able to get car finance, the dealer wanted a deposit, so Bafo ended up borrowing money for the deposit at a much higher rate.

Each time he took on a loan, the amount he had to repay looked manageable, but those incremental loans eventually became a financial burden and Bafo has found himself overindebted.

For Thuli, a mother of four and head of operations at an NGO, her finances went awry when two of her children started tertiary education and she had not made provision for them.

Read more about Thuli's financial journey here

“I used credit cards and personal loans to fund their education. I also did not follow a strict budget. As my partner and I have separate budgets, we didn’t combine our resources. I think this is a main contributor to where things are now in terms of debt,” she says.

How to plan
Right now, you may be able to afford your child’s education from your monthly income, but education costs increase at above-inflation rates. This means that, over time, it will become more difficult to meet those expenses. Start an education fund as early as possible. For tertiary education, encourage your child or siblings to apply for bursaries. Rather than funding your family’s education from your credit card, take out a student loan. The interest rates are far lower than for a credit card or personal loan, and it will help the student build a credit record.


Funding investments

Rushing into investments such as property can create a serious debt trap. According to Nkosi’s financial adviser Funi, Nkosi’s financial situation worsened as a result of not planning properly in terms of her property portfolio.

Read more about Nkosi's financial journey here

“She has good goals of wanting to embark in the property business, but didn’t have a proper financial plan or the knowledge of how much this business would require from her financially without bringing financial strain,” says Funi, who adds that Nkosi used the same salary to accrue two new properties with bonds on top of the one she had not finished paying off. This led her into getting loans to fill the gaps, and eventually running out of cash.

Freelancer Tamsin’s debts are also the result of an investment. While her decision to turn her home into an Airbnb has generated an additional income, she did not plan properly for the loan, which she got from a family friend at an 11.5% interest rate.

Read more about Tamsin's financial journey here

Her adviser Leighanne says: “Her agreement was to pay back the interest the lender was receiving from an existing investment at the time. The problem is that Tamsin had put no time-frame in place to repay the capital.”

How to plan
Before you invest in an asset such as property, draw up a proper cashflow analysis. Understand how much the investment will earn, the debt repayment costs and running costs such as levies. Make sure you understand your breakeven point and when the debt will be repaid. Also remember to include a buffer in your cashflow for months when you might not have a tenant.


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