Forget the doom and gloom - debt is here to stay
When most consumers stood in long queues for Black Friday bargains two weeks ago, the excitement was immediately followed by the surprise interest rate hike, which took the repo rate to 6.75%.
It is therefore prudent to manage your debt smartly. Shop down or delay big-ticket items (cars and houses) and squash those mid-sized debt accounts.
It's going to get tougher out there considering the low growth environment and the escalating consumer inflation, which rose from 4.9% to 5.1% in October. A slight relief is the expected R1- plus drop in the petrol price in December while the rand is currently stronger against the dollar compared to a year ago.
The increase in the prime interest rate mainly affects those consumers who are in debt. Many people who are struggling choose to bury their heads in the sand.
For many in debt, the reality of owing so much money is too much to bear , so they simply choose not to face it. But sometimes disaster strikes and people are forced to confront their circumstances head-on.
A series of unfortunate events such as a sudden job loss, an unexpected (and expensive) home repair, or a serious illness can knock one's finances so off track they can barely keep up with their monthly payments.
Debt is only dangerous if you don't manage it carefully and reduce it as quickly as you can. Debt is here to stay and it's a feature of modern day society as we get bombarded by service providers who tempt us to access loans with ease.
Is there good and bad debt?
If you use debt as a part of your bigger wealth creation strategy, it will increase your level of creditworthiness. For example, good debt would be when you take out a bond to buy a house, because in the long run you will save on rent and you will have a good asset that hopefully increases in value over time.
Depending on the purpose, a personal loan could also qualify as a good debt if, for example, it is used as a study loan. If this personal loan is for an overseas trip then it's a bad debt.
Let's compare a car to a house in terms of valuation. Car financing would be seen as bad debt because over time the value of your car depreciates.
It could become a good debt if it's repaid over a short period of time. Bad debt also includes buying groceries on your credit card. You can do that provided you repay the full outstanding balance on or before due date.
So, in a nutshell, bad debt depreciates much quicker whereas good debt has the propensity to appreciate over time with more rewarding benefits in the long term.
Getting out of debt
Unfortunately, the space between realising you need to pay off debt and getting out of debt can be wrought with hard work and heartache. No matter what kind of debt you're in, paying it off can take years or even decades. It starts with accepting that you are in debt and facing the problem head-on.
Sharing your problem with your acquaintances will give you courage, as your "watchdogs" to ensure that you keep track of your debt reduction strategies. Finally, you should resist the temptation to incur any new debt as you make progress of current debt.
No matter what type of debt you're in, whether it's credit card debt, student loan debt, car loans or something else, it's important to know there is a way out. It may not happen overnight, but a debt-free future could be yours if you create a plan and stick with it long enough.
- Sekese is a certified financial planner professional and member of the Financial Planning Institute (www.fpi.co.za)