MOST people understand the importance of saving for their future and would like to do so; however they are plagued by financial debt.
Although occasionally beneficial, financial debt can be a bottomless pit that drains of all your income and hinders you from setting aside some money for a rainy day.
“The great irony is that debt isn’t always a bad thing. Without it most families could not afford to buy a house or a car. And, in a sense, a bond, particularly, is a type of savings because it enables ordinary people to make an investment in an asset whose value will always increase. The thing to remember about debt, though, is that it’s extremely expensive. So, it really doesn’t make sense to start saving until you are debt free. When you compare the cost of the interest on debt with the interest on savings, you’ll always find that the cost is higher than any gains from the savings,” Standard Bank’s acting head of marketing Sigrid Tjijorokisa says.
Tjijorokisa advises that one needs to take a head-on approach to systematically ridding oneself of debt, thereby paving way for a rewarding nest-egg.
“Using your thirteenth cheque or your bonus to start a savings account while you’re still struggling to pay off, for example, a credit card, your bond, or a car means that you’ll end up with a net loss. You’ll be paying out more than you’re saving.”
The best way to rid o n e s e l f of debt is to first make the conscious decision to stop getting into debt. Verbalising it to your close family and friends helps you cement this decision. “To get out of debt you need to stop using it to fund your lifestyle. This means that you should get rid of your credit cards and stop financing your furniture,” she says.
Once you have made the conscious decision to rid yourself of debt, you need to set up an emergency fund with at least N$3 000 in it. “The emergency fund keeps you from borrowing money or reverting back to using your credit card, thereby putting you in even more debt. You can use the emergency fund to pay for whatever unprecedented costs that arise and it is advisable to keep topping it up when you can. The more money in the fund, the better.”
Additionally, Tjijorokisa also says that one needs to organise their debt, either paying it off from the smallest debt to the largest amount or from the debt with the highest interest rates. However the benefit of paying off the smallest debt first is that it gives you momentum and shows you that you can actually do it. With the wind under your sails it becomes easier paying off the larger debt.
“Throw any excess income you might you might have at your debt, this helps you get through it faster. Also work on a long term budget and try to stick to it. Straying from it can lend you in more debt,” Tjijorokisa stresses.
Take note that using your thirteenth cheque or your bonus to start a savings account while you’re still struggling to pay off, for example, a credit card, your bond, or a car means that you’ll end up with a net loss. You’ll be paying out more than you’re saving.
“In the case of your bond, it’s always better to put extra money into it, so that you both reduce your debt faster and arrive more quickly at a point where your investment in property is going to give you significant returns. Having money in your bond also gives you access to extra cash – at a fraction of the cost of a short term loan”.
*Article compiled by Standard Bank’s Acting Head of Marketing Sigrid Tjijorokisa
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