You can get out of debt – even on a low income!
Mind if I stick my nose in your debt for a moment?
Did you know that in 2014 South Africans were the biggest borrowers in the world? Nothing wrong with borrowing a little money now and then, we all need to from time to time. The problems start when we start borrowing to pay for day-to-day items.
We have become a nation that works almost solely to repay debt, and here’s proof from the World Bank’s Global Findex database: In 2013-2014 worldwide 40% of people took out a loan, but in South Africa 86% did so, and mainly to cover day-to-day costs. At least 30% of South Africa’s adults told the World Bank’s researchers that they would not be able to find enough money should they find themselves in a crisis within the next month.
Many people end up paying an enormous percentage of their personal income on monthly debt payment because they have a very limited understanding of money matters. The result is that South African households spend on average 75-80% of their take-home pay on repaying debts. That means only 20-25% is left to pay for your cost of living, which is not enough, so you borrow more.
More than half of South Africans who have borrowed money, have taken it a step too far and are now over-indebted. This means that they owe so much money that they cannot afford to repay their loans. About 15% of these people are also two or three months behind with their debt instalments; putting them in a poverty cycle and debt trap it seems impossible to get out of.
You know the story: deep in debt, low on money, and not believing that you can do anything to change your situation.
But I’m not buying. The question is not whether you can do it, but how can you not! You have to find a way. If you don’t, what does your financial future look like? More debt? Constant financial stress?
Think about the problem this way: It is not really about how much you owe or how little you earn. What really hurts is all the dreams you have to give up. It is about everything you could have done with that hard-earned money you now have to give to someone else as soon as you get paid at the end of the month.
This is not only bad and stressful for us, the borrowers, but also for South Africa’s economy. When we have barely enough money to pay our debts, it also means that we don’t have extra money to save or spend. No more shopping!
Why is this bad for the economy if consumers – that is you and me – spend less?
To put it very simply, when we can’t afford to buy consumer items such as furniture, food, our own house or a car
• the companies selling them don’t make a profit
• the companies therefore won’t, for instance, be able to employ more workers, or open a new shop and employ even more workers.
• they might even be forced to retrench workers.
When this happens, the economy may grind to a standstill.
On the other hand, if we get rid of our debt
• we will have more money to spend on those very same consumer items, which will make our lives easier
• the companies selling them make money and hopefully a profit
• a profit means that the companies can employ more workers, and even enlarge their businesses to provide jobs for even more workers
• with more workers employed, more families will have food on the table and be in a better position to create a better world for their families.
How to say goodbye to debt
Step 1: Get real
The first step to getting out of debt is to get real about your financial situation. If you’re living in debt and on a low income, you’re in a very precarious financial situation. If you don’t do something now to change it, it isn’t going to change!
• Start seeing your debt as a challenge that you could, and should, tackle. That’s when real progress begins.
• Stop asking “Why is this so hard?” and start asking “How can we meet the challenge before us?”
Step 2: Learn to budget
• Make a list of your expenses, including all your debt payments, child maintenance, transport, etc., down to every last beer or lipstick.
• Make a list of your income, including child maintenance, any rental income, etc.
• Subtract the expenses from your income. If you have money left over, you are in a healthy position and can start paying the “leftover” money towards your debts. If your expenses are more than your income, you are in trouble and it is time to act. Go through your list of expenses and see where you can save.
• Use any extra money to pay off debt. Example: if you have R50, add that to the R500 you pay off on your television set. As soon as your TV is paid off, use the full R550 to add to another monthly payment, maybe your new couch that costs you R600 per month = R1150, which means you will pay off your couch at least twice as fast. The next step is to take that R1150 and add it to yet another monthly payment. This is called the snowball effect. Just like you roll a small snowball in snow and it becomes bigger and bigger, so your debt repayment becomes bigger and bigger as you add to it the amounts you used to pay on former debts.
Step 3: Save money, even on a low income
Right. Now things get tough. Remind yourself why you want to get out of debt: you want to make your dreams come true! Keep the bigger picture in mind.
• Get serious about what you want and what you actually need. Do you need those really expensive clothes, or do you want them? Do you need to be seen at the club or the movies, or do you want to be seen there?
• Ask yourself this question every time you want to spend money. If other people can live without it, so can you. Get ready to buy nothing. Take that money and put it in your savings account.
• Set goals. What do you want to do with your savings? You’d want to keep a couple of thousand at hand for emergencies. Maybe you need a car, or you want to take your family on a holiday. You want your children to go to university, and one day you want to retire comfortably when you are old.
Hard? Yes. But if you stick to it, certainly worth it!
Additional info: growingslower.com