Break the cycle: Stop today’s debt from ruining your tomorrow

Discovery Bank research shows that people who have high levels of unsecured debt are spending at least 20% of their gross monthly income on debt repayments. And one in 10 of us who are in poor financial health are missing repayments for three or more consecutive months. It’s a downward spiral which is difficult to climb out of.  

Reducing indebtedness, including the inappropriate use of short-term credit and creating a savings culture in SA, are major socioeconomic challenges facing both individuals and society as a whole.

We know these bad financial behaviours are the result of the current economic environment and rising living costs, but why is it that 64% of the people who are in poor financial health believe they are better off than they actually are? Along with living in the present, low levels of awareness and a belief that we are better off than we actually are, entrenches debt. 

In SA, 53% of the population borrows money. This rate is higher than many other upper-middle-income countries in the world, according to the World Bank’s 2017 Global Findex Report.

Worse still, credit use is outpacing employment growth — people are borrowing even when they have no means to pay the money back.

Credit facilities such as credit cards, overdrafts and store cards make up 65% of South Africans’ credit accounts — and this is before we look at informal debt from friends and family or moneylenders.

Debt means we aren’t saving

SA’s household savings rate is well below many other Organisation for Economic Co-operation and Development (OECD) countries. In addition, only 40% of SA respondents to an OECD survey were classified as active savers, compared with an average of 64% across other countries. 

What does this mean for our future? Simply put, we will not have emergency funds, which could plummet us further into debt, and we won’t  have enough money to retire comfortably.

Research also shows that 65% of people don’t know what they spent the previous month, and more than half the people who think they know what they spent either over or underestimate this amount. 

Not knowing what you spend makes controlling your spending and debt management more difficult.

Break the cycle

How can we fix this? 

First, by managing our debt. Aim to pay off higher interest, short-term debt first. Continue to pay down until you have as little debt as possible, apart from your home loan and car payments.

Second, by being more aware of our current financial situation.

The link between financial knowledge and financial health is an important one. Research shows that higher levels of financial knowledge are correlated with better financial outcomes and behaviours such as participation in the stock market, adequate retirement planning and debt management.

This is true regardless of income level. In other words, those who earn less could be financially healthier than some with a higher income.

Digital tools such as Discovery Bank’s free Vitality Money Financial Analyser, which provides clients with a real-time view of their finances, can be a great help in this regard. 

The Vitality Money Financial Analyser gives clients personalised details about their income, saving and spending habits and, in doing so, helps them better manage their money.

It enables clients to place their expenses into more than 166 preset categories, and to personalise and reorder categories for anything from holidays to home improvements, with a predictive search functionality. 

With weekly insights on spending trends in each category over time, clients can see what they’re saving by following and keeping to their budgets, and set limits in categories to prevent overspending and so earn more rewards for managing their money well.

This article was paid for by Discovery Bank.