I was recently asked whether or not it was possible for a family of four to live without short-term debt. I think the question needs to be reversed. We need to be asking why we believe we need debt in order to live.
According to the Old Mutual Savings Monitor, 65% of young people believe there is no alternative but to get into debt, yet if I think back to my parent’s generation which was typically a single income family, the only short-term debt they may have had was an account with the local grocer which they settled every month.
Is it really that we have to have debt to live or has it been the proliferation of credit cards and easy access to credit that has made us forget how to live without it?
I recently received a question from a reader who has to take out a loan of R150 000 to pay for his wedding and buy a car. The cost of the wedding alone is equal to a year of his take home salary. What if he didn’t have access to credit, what would he do then?
Easy access to credit has allowed us to live well beyond our means. We live with the belief that we can have whatever we want today and will simply pay for it tomorrow. Unfortunately tomorrow has finally arrived which is why we are seeing households struggling under the highest debt levels in our history and why, despite historically low interest rates, consumers are still struggling to pay off their debts.
We have borrowed from our future earnings to pay for our lifestyles today, but this economic downturn will be here for several years and it is going to be tougher to maintain our spending. We need to prepare ourselves for more moderate lifestyles and that includes how often we eat out, the model of car we drive and how many extra murals our kids do. Think back to when we were growing up, how much more are we spending on our children and our lifestyles today?
So my reply was yes, it is possible to live without credit cards, store cards and revolving overdrafts and it is something we are going to have to take very seriously if we do not want to burden our children with our welfare in later years.
Watch the mortgage term: As our families grow we tend to buy a bigger house around our late 30s to 40s. We take out a mortgage for a further 20 years which means we will be paying it off late into our 50s or even retirement. If you buy a bigger home, opt for a repayment period that will see you debt-free by 50, or 55 at a push.
Pay down the mortgage: The first two years of buying a house are the toughest financially but hopefully your salary increases while your repayments remain static. Once you have some extra cash start paying a bit extra into your mortgage not only to pay it off quicker but also to provide a buffer should interest rates increase.
Cars for cash: Buy a car at a price that you can easily afford to pay off within three years and never, ever take out a residual or balloon payment — they are debt traps. Once your car is paid off, take those monthly repayments and start saving for your next car. Never buy new as you can pick up a year-old car for 25% less or even 50% less for a two-year old car. This is one way to start buying cars with cash.
Pay off the smallest debt first: Start with paying off your store cards which charge the highest interest and have the lowest value. You will be able to pay them off relatively quickly which will give you a moral boost. Once you have paid them off, use that money to start targeting your next debt — usually your credit card — and so on.