Managing Debt and Saving

Learn how to manage debt, deal with debt collectors and learn to increase your savings

Becoming debt-free is one of the most crucial steps towards a healthy financial future. We cannot plan for retirement, save for a house or investment properly if we have short-term debt. Yet, for most of us, becoming debt-free very difficult. South African’s are among the world’s biggest borrowers as the cost of living increases and the economy weakens. Around a quarter of South Africans say they find it easy to save money each month, with the majority of us owing most our paycheck to creditors. Yet, there are things we can do to help. Friendly Finance has put together some tips to begin the path toward a debt-free life.

Reduce your debt using these simple steps

1. Review your debt and prioritise

You’re not alone if you have multiple lines of debt. Credit card and personal loan repayments are just a few bills the average South African will owe each month. To reduce your debt more effectively, you should prioritise repaying the short term that is costing you the most. This is usually the debt with the highest interest rate as the monthly cost of borrowing is bigger. For example, owing R10 000 on a credit card with 20% interest is costlier than a personal loan debt of R9 000 at a 10% interest rate. Repay as much as possible each month (without overextending your finances) to reduce the debt as quickly as possible.

Do not ignore your other debts though – you should still make the minimum repayments each month as a missed payment will be costly.

2. Adjust your expenses

It is important to review your income against your expenditure every month. We can all, at times, be culprits of overspending which consequently makes our financial position less safe. To improve your monthly budget, firstly ensure your income is bigger than your outgoings. If you are spending more than you are bringing home your debt will only worsen. Secondly, try to reduce your outgoings to free up more of your income to pay bills. This is often a very hard process as it means reducing the number of ‘luxury’ items in our lives. However, if you are determined to become debt-free this is a very important step. Below are examples of cost-cutting things you can do to reduce your expenses:

  • Downgrade your cable package
  • Buy to more sale and non-brand groceries
  • Work out and home or outside instead using the gym
  • Pack your own lunch for work instead of buying lunch everyday
  • Reduce the number of dinners you have at restaurants
  • Use a programmable thermostat to not use heating or cooling when you are not at home
  • Cancel unnecessary subscriptions like magazine and gaming subscriptions

3. Generate extra cash

Paying a lump sum of your debt in one go will reduce your monthly repayment amount or the number of months left to repay. To make a lump sum payment you will need to have extra money. If you having savings or investments, it could be worth withdrawing these to repay your debt. You will need to weigh up the benefits of the savings/investments against the cost of the debt to decide whether it is worth doing. For example, if the cost of the debt is higher than the interest being accrued on savings, you may wish to withdraw the funds to help reduce your debt. However, it is not wise to use savings to reduce debt if you are still overspending every month as you will only be facilitating an unsustainable lifestyle that will get you in further financial trouble later.

You can also generate extra cash by selling unwanted possessions. You can sell items online or have a garage sale where all the proceeds are used to repay your debt.

4. Consolidate debt

Money-savvy consumers will know that repaying high-interest debt is not cost effective. If you have several small, high-interest debts you may consider consolidating these to a better rate. There are a couple of options to do this.

  • Balance transfer to an interest-free promotional credit card – credit card providers can offer interest-free periods to new consumers. Making a balance transfer from your existing credit cards to a new interest-free credit card will give you a period where you only repay the principal. Make sure you always meet the minimum repayments as it is often the case that interest-free periods end if repayments are missed.
  • Consolidation loan – You could take out a personal loan to repay your existing debt. For example, if you owe R3 000 on credit card A and R6 000 on credit card B, take out a personal loan of R9 000 to completely pay off the credit cards. This will leave you with one monthly payment (much easier to manage) at usually a better interest rate, meaning the debt is less costly.

5. No new debt

There is good and bad debt. Good debt is one that increases your overall net worth in the long term, such as a mortgage.  Bad debt does not increase your overall net worth and is used to purchases good/services with no last value. For example, the desire for unnecessary, luxury purchases play a factor in our bad debt levels. We tend to want things we can’t afford, such as a new car or outfit, and may borrow money to own them.

You should not take on any further debt if you want to become debt-free, especially bad debt. Cut back on luxury items and save up for them rather using your credit card. Your future self will thank you.

Managing Debt

How to beat debt collectors

It can be a troubling time when a debt collector is on your case. It’s a call we could all do without. Why you are being called can vary, from not paying your broadband bill to one of your creditors chasing because you’re behind on your repayments. When it comes to managing that interaction with a debt collector, Friendly Finance has listed the basic boundaries they can and can’t cross to enforce a knowledge base to help you identify any illegal practices. The National Debt Collection Act 114 of 1998 regulates the process of collecting debts in South Africa. We have outlined a summary below.

Key points

A debt collector can repossess an asset if your debt is secured. A secured debt is collateralised with an asset that you own, like a property or a car.

Debt collectors make their money from taking a percentage of the money you owe your creditor. Dependant on the amount of outstanding debt you owe, they may relent if the amount is too small to cover their costs. In the event of the latter, you will still face a black mark on your credit file, because the unrecovered debt will be reported as unpaid.

If your debt is in the form of unsecured (not collateralised with an underlying asset). The debt collector is actually fairly restricted in terms of legal action they can take to recover the debt.

The bigger the debt, the harder they will try to recover it. Debt collectors will pile resources into including legal action in the form of a court summons. This letter of intent will outline why you are being sued, for how much and your scheduled court date. In the outcome of the debt collector winning the lawsuit (should you not wish to settle the debt prior to a court judgment), the judge will award them a fixed amount of money.

If the debt collector is granted permissions from the court to clip your salary, they issue an order requiring your employer to withhold a certain amount of your earnings each month for a period of time.

A debt collector shouldn't

  • Call before 6 am or after 9 pm, without being authorised by the consumer. They are prohibited from calling on Sunday’s.
  • Repeatedly call you at all hours of the day over a short period of time. For example, they can’t call twice in the same afternoon.
  • Use obscenities or bad language towards you.
  • Misrepresent how much you owe.
  • Falsely claim they’re lawyers, government representatives, the police or credit reporting agencies. Additionally, calling you without telling you who they are or why they’re calling you.
  • Try contacting your employer. Only if the debt is related to overdue child support.
  • Get in touch with a relative or close friend to speak with on behalf of your debt. They are within their means to ask about your whereabouts to try and track you down, however, they can’t divulge any information as to why they need to speak with you.
  • Demand that you speak with them. If you have a lawyer representing you about the debt, let the debt collector know – the debt collector will then need to go through the lawyer instead.
  • Try to recoup more debt than you actually owe, unless they are under contract with the creditor and it’s outlined in their agreement. This also includes trying to collect any interest, fees or additional charges.
  • Deposit a post-dated check early.
  • Use any language or symbol on any mail they send you.
managing debt and savings

Work towards saving

It is always a good idea to start saving. Having a healthy savings fund will provide you with the stability to make long-term investments (such as a deposit on a house), plan for retirement and reduce the likelihood of spiralling into debt. It is recommended that you save a minimum of 10% of your pre-tax earnings each month. To successfully do this you will need to create a financial budget. The budget takes into account your monthly salary and will deduct from that your monthly bills (e.g. housing expense, electricity, gas etc.). The amount left is your ‘disposable income’ and it is from this fund that you need to make sure you save a certain percentage each month. If needed, give yourself an allowance each month and remember that once the allowance is gone, it is gone – you cannot dip into the savings for extra cash.

Below we have outlined some day-to-day ways that could help you reduce your monthly costs and free up more money to be saved away.

Reduce bank costs

Avoid using ATM machines outside of your banking network, as you will incur a fee. Review your account type to make sure it best suits your needs and you are not paying for unwanted services. Set up direct debits to pay your bills automatically so that if you forget a bill from time to time you will not be charged a late fee.

Reduce your vehicle expenses

Remember to review your car insurance every year to make sure you are getting the best deal. Your car value will depreciate each year and this will determine the premiums you are paying, so make sure to update the information.

Keeping your tyres correctly inflated will not only ensure they last longer but will mean your car is more efficient on fuel, reducing your petrol costs each month.

Reduce household food expenses

Try to buy only what you need for the week. It is all too easy when shopping to buy more than is necessary, with the food only going to waste when it is not eaten. Plan your meals and take food for lunch each day. Cooking your own food instead of buying food whilst you’re out will reduce your weekly expenses considerably.

Buy in bulk – single packs cost a lot more (per pack) than the multipacks. This also is true for meat. You can always buy in bulk and freeze what you do not need immediately. It is also cost effective to grow your own vegetables if you have the room, instead of buying.

Shop smart

Always shops around and compare prices to make sure you are getting the best deal. This is especially true (and easier) when shopping online. Did you know that downgrading the brand you buy could reduce the amount you spend as much as 30%!

It is a good idea to know when sales are coming to buy things you need, but don’t buy things simply because they are on sale. Remember that any added expense is still an added expense. Try to plan your shopping before you go by making a list. Not being prepared can lead to impulse buys that are rarely needed.

Reduce your electricity bill

Switch off your TV and lights when they are not being used. Try to use energy efficient products such as light bulbs. Use your washing machine on a cold cycle and dry your clothes outside rather than using a tumble dryer.

Tips to increase your savings

An emergency fund is a great way of protecting yourself financially. Unfortunately, things can happen that we can’t plan for like family illness or car problems, which cost us money either through additional bills or time off work. Having savings to rely on during these times will prevent falling into debt. Financial experts suggest, as a rule of thumb, that your emergency funds should equal around 2-3 months of income.

In reality, though, saving toward an emergency fund can be very difficult. We have previously highlighted the lack of disposable income available to the average South African household. Our article on Debt Review numbers showed that only 23% of us have enough money each month to save, whilst 60% struggle to meet debt repayments. Transunion recent Q3 infographic highlights that household cash flow is at its weakest since 2009 with 3.4 million credit accounts in arrears. As a nation, we are living paycheck to paycheck, which has allowed the payday loan and credit card industries to flourish as they become the easiest route to money in times of emergency.

As difficult as it may be here are some top tips to help set up, and build, your savings for emergencies.

c. Bank extra cash

If you receive extra money from a work bonus or a birthday present, try to resist the urge of going on a spending spree and deposit it into your saving account. Adding to your savings whenever possible will help you reach your goal quicker and, more importantly, secure your financial safety blanket.

This should give you a good starting point but your success in growing your emergency fund will depend on your individual determination and discipline. Avoid dipping into your savings as one day it could be a lifesaver!

a. Set a goal

With anything in life, setting yourself targets will help you keep focus and stick to the plan. Set a total saving goal, like 2 months of income, and work out how much you can save from each payday. You can then calculate how long it will take you to reach your total saving goal for your emergency fund. If you want to build your savings quicker, you could think of ways to make extra money such as selling old clothes.

b. Automate payments

Although not essential, setting up a direct debit from your regular bank account to your savings account will ensure you are building up your savings each month. You can set up the direct debit to transfer the amount you calculated in the previous step to remain on plan. Whatsmore, you can forget about your direct debit once set up and your savings will accumulate automatically. When you finally remember you were saving, you may be surprised by how much you have saved.

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