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by Alec Riddle CFP® B.A.

Are you consciously creating good financial habits? If not, then you will be defaulting to, or subconsciously creating bad habits, which could impact upon your wealth, or your Financial Independence.

One such bad habit could be the treatment of your debt. Unfortunately, this affects millions of South African households, as the average South African spends the majority of their take home pay servicing debt. We are all likely to have debt at some time in our lives, especially to buy property or a car and while we cannot avoid it, we can manage it better.

Did you know that if you purchase a house for R1 Million with a 90% Bond (R900 000), due to be paid back over 240 months (20yrs) at 11% per annum, you will have a monthly repayment of R9 290? This means that you will pay R2 229 527 in total, which equates to an interest charge of R1 329 527, representing cumulative interest of 147% and a major lost opportunity.

So how best do we cut down on the amount of interest? Simply by paying your first installment the day the Bond is registered, as opposed to one month later (in arrears), you could save R70 000. Alternatively by paying an extra R1 000pm into your Bond, you could trim 5 years off your repayment term and save in excess of R400 000 in interest.

Consumer debt is crippling many South Africans and many major corporations are spending millions on market research, to ascertain how best to get you to part with your hard earned money, or worse still, money that you haven’t even earned yet, in the form of loans or credit card purchases. Part of the problem is that we have evolved into a society of instant gratification and just like our children; we don’t want to wait for things. Items such as clothing, holidays, appliances, furniture and vehicles are the common culprits. So ideally if you have got yourself into the debt trap, you need to develop a DEBTONATION plan, to ensure that you are working towards becoming debt free.

Another common problem is converting short term debt to long term debt, via your home bond. It is all very well to consolidate your debt, but only if you are disciplined enough to continue paying what you should be paying on the short term debt. Otherwise, you will just accentuate the problem and fall victim to one of South Africa’s biggest parasites.

You also need to avoid paying 11% plus to service your debt, whilst only earning 8% on your savings, or fixed deposit. The moral of the story is to pay off your debt first and then save!

Alec Riddle
FPI Financial Planner of the Year 2009
Consolidated Financial Planning (PTY) LTD
An authorised financial services provider
FSP License Number 12978
Tel: +27 41 37 37 999
Fax: +27 41 37 37 177
http://www.consolidated.co.za
info@consolidatedec.co.za
221 Cape Road, Mill Park, PORT ELIZABETH, 6001