Each December, the following scenario plays out in thousands of households across South Africa. Mom, Dad and the 2.5 kids hop into the family sedan and drive down to the coast to spend the festive season with friends, family or at their favourite holiday destination. They spend two weeks living it up, eating out, entertaining lavishly, buying expensive Christmas gifts and blowing wads of cash on leisure activities.
By the time New Year arrives, there’s hardly enough money to meet the bills, let alone pay for new school uniforms and school fees.
How can you avoid falling into this unhealthy cash-flow pressure cooker? Here are five simple steps you can take to prevent a debt hangover in 2011.
Step 1: Draw up a budget and stick to it
A simple household budget is a summary of all your income and expenses. On the one side, you show your net monthly income (after tax and all deductions) and, on the other, you list your monthly expenditure. The typical household will be spending money on bond repayments, car instalments, long- and short-term insurance policies, school fees, petrol, food and entertainment, home security, and so on.
Drawing up a detailed spreadsheet of your income and expenses will quickly reveal how much cash you have available for year-end extravagances.
You should apportion any monthly surplus to short-term savings, long-term savings and provision for annual costs such as holidays and school expenses. If your expenses exceed your income, you’re going to have to make certain lifestyle changes.
Step 2: Plan your Christmas expenditure
Once you’ve drawn up a budget you should know exactly how much you’re able to spend over the festive season. It makes sense to plan gift-buying ahead of time — perhaps picking up a few items before the Christmas rush. Draw up a list of all the people you need to buy gifts for and allocate a rand amount to each of them. And don’t go over budget!
If, after an honest assessment of your financial affairs, there really isn’t any spare cash for presents, take a rain cheque. Let your family know you’re not going “mad” this Christmas … It’s quite easy to downsize gifts for your spouse and extended family and focus on gifts for your children instead.
Step 3: Avoid credit
Retailers love the December holidays. People are on leave, cash flush after receiving their year-end bonus and full of the joys of the festive season. These factors combine to create a type of retail euphoria which advertisers immediately latch on to. They lure you with fantastic prices on the latest “must have” tech gadgets. New LCD televisions, digital cameras, furniture and appliances — you name it, they’ll try to foist it on you. And, if you don’t have cash, they’ll gladly swipe your credit card.
The best defence is to refer back to your budget. If you needed a new television or refrigerator, you would have planned for it. If it’s not in the budget, you don’t need it. Simply walk away.
To begin the New Year with a maxed-out credit card simply makes every aspect of future financial discipline more difficult.
Step 4: Pay off debt rather than making more
A discipline you should develop early on is to assess your credit position at least annually. Before blowing your bonus on holidays, gifts and unnecessary appliances, you should clear as much of your short-term debt as possible. The best place to start is to clear the balances on your credit and store cards. Financial planners say you should settle the full outstanding balance on such accounts the minute they fall due. If you pay only the minimum amount, you incur hundreds (if not thousands) of rands in unnecessary interest charges.
Step 5: Get your savings plan on track
South Africans are notoriously poor savers. The choice you have is between instant gratification (blowing all your money on frivolities today) versus saving for the proverbial rainy day. The best Christmas present you can give yourself is to assess your financial situation carefully — budget, plan your December expenditure, dedicate some of your surplus funds to saving and begin the New Year on a sounder financial footing.