Wikus Olivier, debt counsellor at DebtSafe, highlights a number of common financial mistakes that individuals often make, resulting in debt. However, these can be mitigated if discipline is practised and changes are made in spending behaviour.
Consumers can often feel overwhelmed with the number of debt repayments they have to make on a monthly basis. Many people are paying off things such as a mortgage, a vehicle, tertiary education, and credit cards. Research shows that debt can be properly managed; however, it is the classic mistakes that South Africans make that form a common thread, leaving them wrapped in a mountain of debt.
Living outside of your financial means
Fundamentally, the only route out of debt is to stop living beyond your financial means. Not living according to a budget is arguably the most prevalent financial blunder that individuals make when it comes to managing their debt. It is therefore important that individuals realise that getting out of debt and staying out of debt depends vastly on developing – and sticking to – a strict and realistic budget. Ideally, the budget that you create should account for your debt payments. Furthermore, it should also allow for you to pay more than the minimum toward your debt.
Paying only the minimum
Paying only the minimum amount on debt is yet another way that individuals continue to be caught in the cycle of debt. If you cannot make payment in full, ensure that you are able to pay as much as possible, because minimum payments and the resulting interest charges, can cost you a lot in the long run. If this mistake has already been made, it can be avoided by starting to pay your credit card bill in full each month. Redoing your budget so that you are able to increase the amount of your payments, lowering your expenses, as well as looking for ways to earn extra money, are all ways to increase your payments.
Not prioritising properly leads to payments being made in no particular order. Credit card payments should be made first, before tackling other payments, such as vehicle repayments and mortgage. Interest rates on credit card debt are usually higher than other forms of debt like a mortgage. Once the credit card is taken care of, you can then go ahead with making payments on your house and other necessities such as utilities, medical care and groceries. This is however subject to priority.
Credit card abuse
Abusing the power of your credit card is yet another classic example of why many individuals struggle with debt. Many times we find ourselves charging something to our credit cards even though we have the adequate amount of cash to pay for or debit it. It’s best to pay by cash or debit card where possible for purchases such as utilities and groceries. Purchasing these on credit repeatedly can eventually add up, significantly affecting the amount of your credit balance.
Paying off debt with debt
Lastly, paying off credit by taking out more credit almost always leads to an endless cycle of debt. Examples such as taking a loan from one bank to pay off a loan you received from another has often debilitated the financial situations of many. If this is case, the services of a financial advisor or planner is recommended. In the same way, debt counselling should also be considered.
While debt is something many individuals cannot live without, adequate planning, knowing exactly where your finances go each month and altering your spending habits to include only that which you need, can assist you in living debt-free.
DebtSafe’s debt counsellors are registered with the National Credit Regulator (NCR) to offer Debt Counselling Services that are compliant with regulations.