How do we deal with debt?
22 August 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. Joining me now from Old Mutual in Johannesburg is Lynette Nicolson, Research Manager at Old Mutual. Lynette, welcome, good to have you with us.
Lynette Nicolson: Hi Chris.
CG: The focus on this edition of Old Mutual Live Money Coach, the recently released 2016 Old Mutual Savings and Investment Monitor, one of the most in depth studies on how, where and why South Africans save. Lynette, let’s start with a very important question, how do we deal with debt?
Nearly all of us have debt of some kind or another. In tough economic times when incomes are under pressure, when costs are rising, debt can become a real nightmare, how are we as South Africans coping with this, what’s the main headline?
LN: Chris, I think the first headline is that the debt servicing figure, so in terms of what proportion of our income we pay towards debt servicing has increased year on year from 12-16%. It might seem small, but that is quite significant. So we’re paying more every month towards debt servicing.
I think the other behavioural issue how we’re paying that debt off, in terms of patterns. All the debt vehicles that we look at, there’s the same story coming through. That is that more and more people are just paying off the minimum amount that they have to pay every month. Less and less people are paying extra into debt.
CG: That, presumably, tells us that times are tough.
Personal loans are on the increase
LN: Definitely, absolutely it does and I also think that when we look at our personal loan figures, which we really focused on this year. Because we saw something there, we saw a story. Something emerging is that we can see that more and more people and it doesn’t matter about income level, are taking out personal loans.
CG: Property ownership is on the increase, that is a good sign, I’d have thought. But are we able to make our bond repayments?
LN: Yes, so once again I think I’ll go back to the debt repayment patterns where specifically for bonds, three or so years ago. 3-4 years ago, it was around 30% of people were saying they’re putting extra into their bond every month, which is great. Bringing down debt faster.
We know that from our definition of savings, any over and above normal instalment is classified as a saving. Now, we’ve seen quite a dramatic decline in terms of the percentage of people that are putting in more into their bond every month.
CG: Many of us believe that our primary residence, talking of bond repayments, our primary residence is also going to be our nest egg, or at least part of it, for retirement.
Is your property a nest egg?
LN: Yes, and I think that any braai that you go to or dinner, you hear this. No, no, no, my property is my nest egg.
CG: Is that wise?
LN: I think to a certain extent people will always think that. Whether that’s their only nest egg or whether that’s their only retirement nest egg. I think that’s where the issue comes in, but we have seen year on year that more and more people are thinking that their property is their retirement, part of their retirement plan at least. Interestingly, in Cape Town we have quite a significantly higher percentage of people feeling that.
CG: And where they go and live once they’ve sold the house to retire? But I guess that’s a discussion for another time. Where do credit cards fit into the picture Lynette? They can be very easy to get, but hell of a difficult to pay off?
LN: Yes, we haven’t seen a massive increase in credit card ownership, if I can put it like that, or taking out credit cards. But that might also be because financial institutions maybe are not so easy in giving them out. I say that with respect.
But yes, credit cards, we haven’t seen a massive increase, but when we do interview people and we do ask how you pay off your debt. So I take from this credit card to pay that credit card and then they get very embarrassed when they tell us that. But interestingly, they still tell us.
CG: Now, are these credit cards, Lynette, different from store cards?
LN: Yes, so we monitor both forms of debt. Store cards much more prevalent, in the 60% in terms of incidence of having. Store cards, yes. Same payment methods though and I think people are a little bit less likely to skip a credit card payment than a store card payment.
The implications of skipping payments
CG: Of course the implications of skipping a payment on one or the other can be much the same.
LN: Absolutely and it was quite interesting how many people were telling us that they actually are, they actually do pay irregularly or miss payments. You know, when you do research, you always look for that percentage. Because most times it’s under-claimed, people won’t tell you that. But actually there was quite a significant number of people admitting to that.
CG: You mentioned personal loans. We talk about what kind of personal loan, are we including in that loans from family and friends?
LN: Yes, definitely, so we’ve got three types of persona loans. Personal loans from a financial institution, personal loan from a family or friend and personal loans from a micro-lender. The family and friend personal loans, we see that the incidents of people doing that or taking a loan from a family or friend has increased dramatically, particularly in the middle to lower income categories.
CG: Lynette, do we budget properly, I wonder, do we keep track of how we spend and what we spend it on?
LN: Once again, we ask people this and you’ll see there’s a varied response. Some people see budgeting as checking my statement every month. Some people see budgeting as sitting down as a family and budgeting every month. You know, people, I’m not sure that I believe, there’s quite a lot of people that say yes, I do budget.
When we say: Do you stick to that budget, then things start looking a bit different. Sometimes, yes, maybe, so I’m not sure that we, although I think where we’re coming from now. From the financial situation, I think we’re having to do that more.
Debt repayments are out weighing savings
CG: You’re listening to Old Mutual Live, the Money Coach edition, on demand, visit dogreatthings.co.za. Lynette, final question for you, if you add together the research on savings on the one side and loans and debt on the other, what’s your conclusion?
LN: Our conclusion is that there are a great number of South Africans that are paying much more off on debt than saving. While that might be realistic, one needs to get rid of debt, there must be ways of saving. So, absolutely, pay that debt off, as quickly as you can and once it’s paid off, use that money that you were paying to put into savings.
CG: This has been another edition of Old Mutual Live Money Coach, my name is Chris Gibbons and with me on the line from Johannesburg has been Lynette Nicolson, Research Manager at Old Mutual. Lynette, thanks for having been with us. Remember, please feel free to get in touch any time.
If you have any questions for me or topics you would like covered on Old Mutual Live Money Coach. Feel free to send them direct to me at firstname.lastname@example.org, I would be delighted to hear from you. Until the next time, thank you for listening, Old Mutual Live, on mobile, on digital, on demand.