In last week’s post, we introduced you to the idea of budgeting and the importance of putting some effort into managing your finances. Learning to budget and keep control of your money is a vital first step towards a healthy financial future.
Now that you are starting to draw up your weekly or monthly budget (and sticking to it!), we thought it would be useful to provide some important info on how to ensure your financial stability, in particular by making wise decision when borrowing money or getting credit.
The first step to financial health is having control of your finances and being aware of where your money is going. That’s where budgeting comes in – a budget is essentially a plan for your money. You decide your priorities for spending and then you develop a budget or a plan so you know where your money is going and how much you have at any point in time. For a refresher, check out last week’s article on managing your finances.
Being financially healthy doesn’t stop there, however. An important part of ensuring you are financially stable is being financially aware and educating yourself about how money works. One of the most common problems facing many South Africans is debt. According to various sources, South Africans are some of the biggest borrowers in the world and we have an ever-growing number of people who are taking on debt that they cannot afford. Part of the problem is that many South Africans do not understand how debt works and do not realise the consequences of borrowing money. In simple terms, taking on debt is when you borrow money that is not yours and agree to repay the money with certain conditions. The lender of the money could be a financial institution such as a bank or even just a friend or relative, and the conditions of repayment usually involve a rate of interest. The interest rate is the price that the borrower pays the lender, over and above the amount that is borrowed, for the service that the lender provides (i.e. providing the money to the borrower). For example, if you borrow R100 from your friend today and agree to pay her back R110 next week, you will be paying her R10 extra, which is a 10% interest rate.
It’s important to note that not all debt is necessarily bad – taking out a student loan to pay for your studies or a mortgage to buy a house can both be wise financial decisions provided that you are able to repay the agreed amounts in the future. In these cases, you should be careful to note the interest rate and repayment conditions and research different providers to ensure you get the best deal. And of course, you should look at your income and ensure you will be able to service the debt based on your current and future earnings.
Another important thing to understand is that debt is not just when you borrow money. One of the biggest problems for South African consumers (and especially students) is credit accounts with retail stores. These accounts allow you to buy goods such as food or clothes on credit and then pay for them at a later date. Many people don’t realise that the amount you eventually pay is a lot more than the original price of the goods because the stores charge very high rates of interest, sometimes more than 20%. And because these credit accounts are relatively easy to open, the average consumer has more than one credit account and is in debt to a number of different institutions. At best this means you will be paying a lot of your income towards interest payments rather than on important things you need. At worst, you could end up with debts that you cannot pay which can have long-term legal implications and may prevent you from being able to borrow in future for big, important things like a house or a car.
So, with all of the above in mind, our advice to you is simple. Make sure you are aware of the implications of your financial decisions, especially when it comes to borrowing money or opening a credit account. Avoid opening any credit accounts if you can help it and if you do, make sure you know the interest rates, the payment conditions and whether you have enough income to pay your account each month. The more you know about where your money is coming from and where it’s going, the better financial health you will enjoy. Your financial well-being is your own responsibility – take ownership of it now and you will set yourself up for a healthy financial future!