Taking charge of your debt

HANNA ZIADY:  On this Friday evening we are talking about getting a hold on your debt. Where do you start, how do you know what the warning signs are, and which debt should you pay off first?

We are joined in the studio by Eunice Sibiya, who is head of consumer education at FNB. Eunice, welcome to the show.

EUNICE SIBIYA:  Good evening, Hanna.

HANNA ZIADY:  Good to have you here with us. Now, my sense is that there are number of people out there who don’t think they are over-indebted, but probably are, and are perhaps simply accepting the fact – and I think many of us do this – that they need credit to fund their particular lifestyle. What are the warning signs that your debt is out of control?

EUNICE SIBIYA:  There are quite a few warning signs. As to your opening comment, most of us do know. If we were just to be honest, that the crunch is tighter. We do know that now we are up to our necks – everything is under water. It is a case of being honest and acknowledging the situation as it is.

However, once we have acknowledged and we actually have identified that I am now under water, what do we run to, what do we think is the solution? It’s credit. But the situation right now is over-indebtedness, so if I take up more credit what is it going to result into?

HANNA ZIADY:  More indebtedness.

EUNICE SIBIYA:  Over-indebtedness. Then you are in a debt spiral. It therefore becomes very, very difficult to come out. So right now, I think we could just mention a few signs to say: how do we know that we actually are facing rock-bottom?

I think No 1 is when you are tempted or are in the process of undertaking more credit to fill the gap – that is sign number one.

HANNA ZIADY:  Borrowing from Peter to pay Paul, in other words?

EUNICE SIBIYA:  And now we are not there yet – you are borrowing more to fill the gap. And borrowing more would also be using your credit card, because that is a loan. So the more you tap into your credit-card facility to fill the gap, maybe to buy groceries or to pay school fees or to pay for petrol, usually that is a sign that you are running short.

HANNA ZIADY: I think that’s a very important point. I just want to double-click there, because the perception is often that unsecured lending is something that lower-income, poorer people do while slightly more affluent people don’t take out unsecured loans. But effectively a credit card is just one big unsecured loan.

EUNICE SIBIYA: Can I tell you that the scales are almost tipping to the opposite, because the lower end of the market, yes, they are over-indebted. But let me tell you that the middle to upper market – we are consuming more and more debt to sustain our lifestyles. Our lifestyles are very expensive. We are driving an expensive car, you live in an expensive house and neighbourhood, your kids go to expensive schools – everything is expensive. Your furniture and everything is in good taste. Taste is expensive. So you find that your income is no longer able to afford your lifestyle as it is now. But you feel you need to maintain that. That’s where the problem starts. We do things often – and this is a general statement I must just disclaim – that we often do things to please other people. Come month end I’m all by myself, no one is there to help me with the payments.

So it is us taking stock of ourselves. What is my situation? I always say, have that meeting with self, be honest, be sober, have pen and paper, water and tissues. But that meeting has to happen, and it has to happen earnestly. Until you do that, writing down in  black and white your budget, you actually do not have a clue how your finances stand because often you find that the total, when you tally up the expenses, amount to more than your income. Obviously the percentages will differ. For some people it’s maybe 1% or 2% more. For some people it could be 10%, 20% more. And that’s what drives the need to be taking more and more credit because I have a deficit.

HANNA ZIADY:  I think that’s vital. And to start at the very beginning with a budget, as you say. Sit down, be honest.

EUNICE SIBIYA:  We take it so lightly, we take it ever so lightly, but that is the only tool that paints a true picture, if you are honest. It paints a true picture of the situation. And from there you are able to identify areas where you can cut down. You cut down on entertainment, cut down on groceries, maybe sticking to the basics, cut down and some people would say: what entertainment? But entertainment is not going out to a big event, a big party or whatever. [It can be] small things.

Someone said Eunice, you must add cigarettes and alcohol to entertainment. So, for the smokers, do you know how much you spend a month on your smokes? How much is a carton and how many ciggies do you smoke a day, do you burn up a day? How much does it tally up to in a month? Can you maybe cut down to one pack a day if you are smoking more than one? Or whatever. Alcohol – we do a pack of six here, a pack of 12 there. Then we buy the expensive one, the fancy one with a name and a surname. They are all expensive.

SIKI MGABADELI:  But it’s all fancy stickers on the bottle, that’s the thing.

EUNICE SIBIYA:  Sometimes you want to change the bottle; you can’t throw the bottle away because it is so beautiful and expensive. Those are costs that we could cut down on. Can we maybe cut down on our lifestyle and just stick to the basics?

We spoke about downgrading the other day, to ask how many people are willing to downgrade on their lifestyle. Would you take your car back to the dealer and trade it for something smaller, something more affordable, if we can put it that way, because when we say “cheap” it sounds tacky. Can we take something more affordable? Are you worried what your friends and colleagues are going to say if you now are no longer driving your big 4X4 but a normal sedan? Are they going to say the chips are down? Maybe the chips are down, it’s nobody’s business. I am now taking care oy situation and my situation calls for me to downgrade. I am going to downgrade.

If I’m used to ordering lunch at work, and every afternoon like “your order is here”, then I shout all the way to reception to pick up my order and everything. And if I realise that’s my area of cutting down, from the following day I bring sarmies or lunch from home. Duh, that’s my situation, and I am taking control of my situation because you guys ain’t helping in the debt. So I have stopped, I am going to stop pleasing you guys.

If we could just adopt the principles of financial management, they are not that difficult.

HANNA ZIADY:  They way I’ve heard it expressed is:” Stop borrowing money you don’t have to buy stuff you don’t need in order to impress people you don’t like.”

EUNICE SIBIYA:  Thank you very much – people you don’t know. They don’t even know you. You go to an event and you meet half the people you don’t know, but you feel compelled to have a new dress. For whom? For what?

HANNA ZIADY:  Borrow a dress from a friend if you are tired of your own dresses – that’s what I do. When I am tired of my dresses I borrow one from a friend.

EUNICE SIBIYA:  But let’s be realistic, and let us stop hiding behind our thumbs. Let us face the situation honestly. Can we stop complicating the situation because we are scared of facing it and taking charge of the situation, meaning I need to change? I need to take a step change. I call it a financial U-turn. When you are driving to a destination and you realise that that you are lost, what do you do? You do not continue carrying on, because you’ve just been made aware that you were driving down the wrong path, and you are therefore lost. Financially speaking, let’s adopt the same attitude – I am now on the wrong path financially and I need to make a U-turn.

If you are driving a Uno, it’s quick. But a two-ton truck or whatever would take a bit of an effort, but you’ll get there. An 18-wheeler can ultimately make the U-turn, it doesn’t t matter how many mini-turns are needed. Can we just make a decision honestly to say, my situation calls for a U-turn.

There are people who are not financially over-indebted yet, but some of them are already tapping on their reserves. Do not stop saving. And for those who are not saving, start saving. Again, it calls for cutting down. Cut down somewhere and start saving. Work on maintaining if not increasing those reserves because the tide is about to get rougher, the sea is about to get rougher. Let’s work on having the reserves, and the reserves are going to help us not get into the habit of borrowing more to sustain myself.

And again, let us identify [priorities] when you are doing your budget. Look at your debt, prioritise your debt, look at the most expensive debt. It could be the big debt, maybe like your home loan, but it could also be the smaller debts, the clothing accounts, etc. Another thing – we don’t even know how much interest we are charged on those smaller debts. Maybe the smaller ones are the most expensive in terms of the interest rate that you are charged. So let’s look at that. And aim to kill your debts, pay them off.

Once you have paid one off, do not say yippee, now I have money to blow. No. Add that [payment] onto the next debt. Kill them one by one if you can. But let’s work towards being debt-free, and usually we are referring to the smaller, unnecessary debts. We have multiple clothing accounts – why? Maybe two – have one or two. But we all know our own situations. Take care of your situation and be realistic and be honest with yourself.

HANNA ZIADY:  We have been talking about some of the lifestyle changes we can make to really get a hold on our debt, to kill our debt, and to build up our savings, our investments. And I think this is where the power of compound interest will truly change your life because it works both ways for investment and for debt.

We have a question from one of our listeners, Lerato in Yeoville, asking if it’s wise to put money into my credit card and then effectively use it as a debit card for daily use. This is something that a lot of people do to get points for in a rewards programme, etc, paying off their credit card at the end of the month, but using it effectively as a debit card.

EUNICE SIBIYA:  The crux is paying it off every month, if you can afford to do that. I know of people who transfer their salary, and as soon as they get paid, [it goes] from the cheque account into the credit card account and they use it from there. If you stick to that amount, your salary, and don’t get into a habit of then tapping into the credit card allowance, so you are in essence using your money but it’s from  credit card account, that’s fine – as long as you can settle it every month.

However, it’s not something that you go around punting, because not everyone is disciplined, that’s the thing. Most people use their salary from the cheque account, finish that off, and then tap into the credit card on a monthly basis. So imagine paying for groceries with your credit card – R1 500 maybe or R2 000 every month, and you put it on a 12-month payment schedule. So, as you walk out with a trolley, the following month when you are back you only make a 10% or a minimum payment. You are never going to finish it. So that’s what we are guarding against.

However, if it’s your salary that’s moved from the cheque account into the credit card and you use it there for bonuses and rewards purposes, and you stick to only that amount, it requires strict discipline. And for those people who can maintain that discipline, that’s fine.

HANNA ZIADY:  I think that comes back to the point you made at the beginning – know yourself and be honest with yourself.

EUNICE SIBIYA:  Yes. A credit card is a loan, by the way. It’s not an extension to your salary. It is a loan and you need to pay it back. It’s just that because we pay so little towards the outstanding balance most people don’t feel it. I know of people who pay it today and the very next morning they withdraw the money and use it again. So you haven’t paid, because the balance is not moving. It requires strict discipline.

Remember that credit is meant to stand us in good stead. We need to understand the rules of the game, we need to use it when it’s really, really necessary, not just as a backup or a top-up. Otherwise it becomes very expensive and leads to a debt spiral.

HANNA ZIADY:  There you go, use it well. Thanks to Eunice Sibiya, head of consumer education at FNB.