5 steps to getting out of debt
09 July 2016
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On mobile, on digital, on demand, this is Old Mutual Live, the Money Coach edition. Hello and welcome, my name is Chris Gibbons. With me in the Old Mutual Live studio is John Manyike, Head of Financial Education at Old Mutual. John welcome, good to have you with us.
John Manyike: Thanks for having me.
CG: My pleasure. Now, the question in front of me is one that is very personal. I am in trouble. At first it was a small loan, then it was an account at one of the chain stores. Then another, then a credit card. Suddenly I’m in so much debt, I don’t know what I’m doing and I don’t know how to get out of it. Set the scene for me, am I typical?
JM: Yes, it’s a very common phenomenon in South Africa. As you’d imagine, there’s over reliance on credit. So it all starts with one small debt, one small loan here. Maybe a lender calling you and saying you qualify for a loan, you qualify for a credit card. Or you qualify for buying power, the retail store. Before you know it, you’re hooked.
How much of our income is consumed by debt?
CG: In terms of the average household, how much of income is consumed by debt?
JM: According to the National Credit Bureau, our debt to income ratio is estimated about 75%. Our debt to income ratio is a percentage of our disposable income that goes to servicing debt. Which means that out of every R100, about R75 goes to servicing debt. That’s huge according to world standard. The healthy rate around the world is around 36%, but the minute you get to 50%, you’re really in ICU. South Africa is sitting at 75%.
CG: What role is played in all of this, John, by the employers?
JM: You see, it’s very important for employers to play a role because the debt situation of your employees can affect their productivity levels. Can affect a whole lot of things. Sometimes you lose employees because they want to resign to access their pension to pay off their debt. So you’re losing talent.
But also some employees would even engage in fraud and theft because they’re trying to make ends meet or they’re trying to live a lavish life. There are certain risks for employers as well, that’s why it’s important for employers to at least have a focus. Make sure that they facilitate some kind of an intervention for employees to go through a financial education programme.
CG: Let’s come back to that in a moment. I want to focus on me. I think you have a list, you have five steps that can help me get out of debt.
Step 1 – move past denial
CG: What’s number one, what’s top of the list?
JM: Number one, you need to take your head out of the sand. A lot of people are in denial when it comes to their debt. Because of this denial they wait. Even when they receive letters of demand, warning letters, they don’t respond. They don’t take calls, they don’t take private numbers. As a result, before they know it, then they get a letter from the sheriff. At that time, the removable assets are at risk. Even the movable assets may be at risk.
CG: If I get it completely wrong, I may lose, not just the TV set, I could lose the house.
CG: And the car and everything else.
Step 2 – stop living beyond your means
CG: So that’s step number one, take your head out of the sand. Step number two?
JM: Number two is cut the fat. Many of us actually live beyond our means. You know you earn, say R10 000 a month, as an example. But you’re living a life of somebody who earns R25 000 in a month. So there’s more money going out than money coming in. In fact, we spend more money than the money we have. So, that becomes a problem. So we need to cut the fat, we need to adjust our budget and live within our means. That’s number two.
Step 3 – know what you owe
CG: And number three?
JM: Number three is you need to know what you owe. A lot of people don’t know how much they owe. They know they’ve got debt. But they’ve never sat down to do research, how much do I owe. If you don’t know the size of your problem, you cannot tackle it.
CG: How do I do that?
JM: You need to look at your bank statement, look at your past three months, what are you spending your money on. But also look at all the different credit agreements that you have. Whether it’s your mortgage bond, whether it’s your car finance, personal loans, all sorts.
You need to look at what are your repayments and how much do you owe. What types of debts you have and how much do you owe. How much are you repaying each month. What interest rates are you paying and when will you finish paying your debts and all those things.
CG: So really get a handle on the numbers.
Step 4 – start negotiations
CG: Number four?
JM: Number four, you need to start negotiating with your creditors. This applies especially for those are over indebted, you need to start negotiating with your credits. More often than not people don’t make an effort. But you’d be surprised at how many creditors are willing to discuss a payment arrangement with you. To try and save your account and for you to keep your belongings. It’s a very necessary discussion, really do make an effort to negotiate with a creditor, Come up with a payment plan and then you’re good.
CG: Last, but by no means least, number five?
Step 5 – charge down your debt
JM: Number five is you need to charge down your debt.
CG: What does that mean? Charge down your debt?
JM: It means you need to look at your debts with highest interest because sometimes we don’t judge these things correctly. We think your biggest debt is the one with more digits. But you can have a debt of R10 000 and another one of R1 000, but the R1 000 could be your more expensive debt. Because the interest on the thousand is much higher than the one on the ten thousand.
You need to understand which one is your most expensive debt. Charging down your debt means paying more than what is required. Because you’re going to shave off the interest that you’re going to pay over time. You need to really work out, all these different ways. You need to look at them and find ways to implement them.
CG: You’re listening to Old Mutual Live, the Money Coach edition, on demand, visit dogreatthings.co.za. Before we return John, to what the employer can do in this situation, just run very briefly through those five headings again for me.
JM: Okay, take your head out of the sand, in other words, face the problem. Number two, you need to cut the fat, that means living within your means and adjusting your budget. Number three, it means you need to know what you owe. Number four, you need to negotiate with your creditors and have a payment plan. So at least you’re not under pressure and you mitigate the risk of receiving letters from the sheriff and so on. Last, but not least, you need to charge down your debt.
How you as an employer can help
CG: Charge down your debt. All right, now bring it back for me to the employer. I’m an employer, let’s imagine, and I care for my employees and I want to help them deal with these problems. What options are available to me?
JM: At Old Mutual we have a team of facilitators across all provinces who can converse in all official languages. We certainly are open to any employer who would approach us and say: We would like a financial education workshop for our employees.
We come out to you as an employee, at your premises and facilitate the programme at no cost. This is a bank SETA accredited programme which is called On the Money. If you need one of those programmes, you’re more than welcome to email us at firstname.lastname@example.org.
CG: This has been another edition of Old Mutual Live, the Money Coach edition. My name is Chris Gibbons, with me in the Money Coach studio has been John Manyike, Head of Financial Education at Old Mutual. John, if the listeners want more information above the email address you’ve just given out, where would they go?
JM: You can also visit the Old Mutual website, you’ll find more information about our financial education programmes. But you can also join our digital community on Facebook, which is On the Money Financial Education Programme, or you can follow us on Twitter, which is OM_OnTheMoney.
CG: There you go, get in touch, any time. If you have any questions for either John or me, or topics you’d like us to cover on Old Mutual Live Money Coach. Please feel free to send them direct to me at email@example.com, we’d be delighted to hear from you. Until the next time, thank you for listening Old Mutual Live, on mobile, on digital, on demand.