Get the better of debt

We all know we live beyond our means, that we buy too easily on impulse and to impress people, and that we do not save nearly enough, but after a session with financial guru Suze Orman, I began to feel committed to actually doing something about it. Her story is in itself inspiring, from waitress to financial guru, and by the time she is finished evangelising about personal power and how great it feels not to have debt, there is a feeling that maybe this time it’s possible to stick to a budget.

Orman is generally extremely positive about South Africa, having watched it develop over the past five years. “This country has an amazing amount of hope, unlike the US where there is no feeling of hope.
We have high budget deficits; the rich are getting richer and the poor are getting poorer. In South Africa, there is a sense of hope, a future with possibilities.” She has just bought her second home in South Africa, in Northcliff, west of Johannesburg. Although the property boom has sent prices soaring, she believes that property remains a good investment. “South Africa is on the same path that the US was with lower interest rates. You may see interest rates pick up slightly as a result of oil, but over the longer term, interest rates in South Africa will keep getting lower.”

Orman also commented on the number of luxury sedans on South African roads, which she says is the highest level she has seen compared with other countries. She recommends that although buying a car puts one in debt, people should only buy what they can afford. Her advice is not to use a residual payment to purchase a more expensive vehicle.

Orman says people need to pay off the bonds on their homes as there is nothing to make a person feel more powerful than owning a home, something no one can take away. While she believes in property as an investment, she says people should only buy if they can afford to. Do not rely on a tenant to make bond payments; it’s essential to have enough working capital in the bank to fall back on.

But Orman has serious concerns about the increasing debt levels in South Africa. Three years ago, when she spoke to audiences, most people had credit card debt of about R1 000 to R2 000, although the credit card interest rate was at 35%. Today, with interest rates having dropped to 17%, people have R3 000 to R4 000 of credit card debt. Orman argues that it is better to have only R1 000 of debt at 35% than R3 000 of debt at 17% because it indicates an increasing spending pattern. When people ask her how they should invest their money, she recommends paying off credit cards first. Not only do these attract high interest rates, but they are made up of “bad debt”—purchases of clothes or other non-asset-based items that should only be bought with cash.

“By paying off your credit card, you will be guaranteed a tax-free return of 17% on your money, which is a very good investment,” said Orman.

She was also concerned that many people in the audience did not actually know how much debt they had and, in one case, a woman did not know what her mortgage bond rate was.

“The only way to get out of debt is to face it. Understand why you spend more than you have.”

Once debts have been paid off, start saving as soon as possible. Saving R100 a month from the age of 25 to 65, growing at 12% a year, will yield R1-million. If the saving started at 35, which equates to just R12 000 less, only R300 000 would be saved by the age of 65.

She also urged people to educate themselves financially. “Don’t leave it to the financial institutions that may not have your best interests in mind. It will make you feel more powerful.” A good financial adviser will first ask about what kind of debt before recommending an investment.

After listening to Orman’s views on the danger of credit card debt and feeling truly inspired to review my budget, it was amusing that in the packs handed out after the event, FNB had included a little key ring with an FNB credit card logo on it.

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