Before 2007, we had little protection against unscrupulous lenders who took advantage of those of us ignorant about budgets.
If we didn’t have healthy spending habits, we were often taken for a ride. But the National Credit Act (NCA) has since put a stop to reckless lending – and in the process forced us to assume responsibility for managing our budgets.
Paul Slot, director of debt-counselling at Octogen, says that every year hundreds of thousands of South Africans fall into the debt trap. And although consumers are advised to draw up budgets, many of us don’t actually know where to start, or how to do this effectively. Slot offers these tips:
- Even those who are not good with budgets should be able to follow the “35:25:35” principle – allocate 35% of monthly income to household expenditure, 25% to financial services and 35% to debt repayments. The extra 5% should be put away as an emergency saving.
- Draw up a budget for a few months at a time. This is because the costs of items can go up or down (usually up), especially household expenses and entertainment, so it’s very easy to underestimate what you’ll spend three months from now. “Don’t underestimate the funds you’ll need for essential items like travel, telephone, water and electricity because they might be ‘grudge’ payments,” Slot cautions.
- It’s easy to get into debt because, more often than not, it happens incrementally. We’re often blinded by what appear to be quite reasonable monthly repayments for items. And haven’t you heard telesales people saying to you, “But an extra R50 a month isn’t going to break the bank, is it?” Well, yes and no! All these “reasonable payments” add up and can amount to quite a large figure, putting people in financial difficulties.
- Consumers must always complete applications honestly and comprehensively. Giving false or incomplete information to a credit provider means that, if you run into trouble later, you can’t expect NCA protection. “Failure to disclose all agreements can mean the consumer won’t be protected by the law,” says Slot.
- Make sure you know exactly what you are agreeing to when you enter into a new credit arrangement. If you don’t understand the risks, costs and obligations, you may get into debt over your head. If you’re spending more than 40% to 50% of your budget on repaying debt, you’re already in trouble. Don’t apply for more credit, and start changing your spending habits immediately.