By Claire Klaasen
With the continuous interest rate hikes and increases in inflation, consumers should carefully manage their finances to reduce the cost of credit and avoid being over-indebted.
Over-indebtedness is a stage in your financial life where you have accumulated debt that exceeds your monthly income. The first sign that you are over-indebted is when more than 70% of your net income is paid toward debts, bills, or living expenses, and you need assistance with managing your finances.
According to DebtBusters’ Q3 2022 Debt Index, there has been more than a 30% increase in debt counselling inquiries compared to the same period a year ago, indicating that the financial stress consumers are currently experiencing has significantly increased
The index shows that, on average, consumers enquiring about debt counselling spend 62% of their take-home pay to service debt. This figure would have been acceptable had the 62% included living expenses like accommodation, fuel, insurance, car instalments, clothing, maintenance, food, municipal rates and taxes.
Improving your financial wellness through the help of a financial adviser
If you need to find ways to improve your financial wellness, the first thing to start with is to speak to a financial adviser. You wouldn’t necessarily repair your own vehicle in the case of a mechanical breakdown.
In most cases, you need a mechanical engineer who knows their way around an engine and understands how to analyse the problem causing the breakdown or poor performance of the engine.
This is how a financial adviser, who takes the client’s needs into consideration, would approach over-indebtedness.
One would never try to repair an engine without having the knowledge required to assess and solve the mechanical problem. This is also how a financial adviser can come in to help you regain your financial well-being.
A financial adviser’s role is to help you to achieve your financial goals in life, irrespective of your current financial situation. Based on the financial needs analysis conducted by the financial adviser, they will assess your needs, your current lifestyle, and future financial and personal goals.
This will give the adviser a holistic view of the tailored solution you need to reach your goal, whether you need financial coaching to assist you to initiate medical aid, life cover, short-term insurance, or investments.
After the above process, you will receive quotations to review and compare. Together with your financial adviser, you will then need to decide on the type of product you need or think is suitable for your needs.
Should you ever feel rushed into deciding to purchase a financial product, you always have the right to say no, without feeling as though you are letting someone down.
Attaining the correct financial behaviour and decision-making is not an overnight process. A financial adviser who understands this will ensure that you reach your financial well-being.
Tips on how to avoid overspending and over-indebtedness:
– Draw up a budget and stick to it. Do not spend more than you earn and save for emergencies even though it is a minimal amount.
– Apply the 70, 20, 10 rule toward spending. 70% of your net income goes towards paying for living expenses, 20% of your net income goes towards savings and investing in yourself, whether it is to improve your skills or funding a hobby, and 10% of your net income goes towards charity, including helping family or individuals who are struggling or donating to a charity organisation.
– Track your spending daily by writing it down in a journal or typing it in the note app on your phone.
– No matter what you desire, plan your spending. Save towards items that you know will probably need you to purchase on credit and rather pay cash for the item. This prevents the regret of paying interest for an item that you could have saved for.
– Have a deep conversation with yourself on how you should minimise spending and maximise your earning potential. Upgrade your qualification or learn a new course so that you are in line for a promotion or increase due to the skills you acquired. This will provide you with the opportunity to apply for a role where your income could be substantially increased.
– Know the difference between fixed and variable expenses.
– Fixed expenses remain the same for the period you must pay them. Set up a recurring debit order from your bank account close to or on your pay day to ensure that you never skip a payment, for example, your rent or payment towards a debt.
– Variable expenses change from month to month. Try to keep these expenses to a minimum.
– Make arrangements with creditors for payments you may have missed due to a shortfall of income versus expenses.
– Increase your earning potential by adopting a side hustle. Find what drives you and what your passion is, do research on the best way to earn an income from it.
– Take note of the needs in your community and start a small business from the needs of the people around you, they can become your customers.
– For example, there are times when people miss the weekly rotational dirt collection, offer the services of collecting rubble that cannot be placed in municipal bins or offer a grass cutting or gardening service in your local community.
– Some people are gifted at writing, editing, or organising. There are several ways to make extra money. This will alleviate the burden of paying off debt from your salary or wages earned monthly.
– Before you enter a debt consolidation or debt counselling process, do your research on the provider and the extent to which you will be tied to a court order that will prevent you from applying for credit. There is no easy fix to overcoming over-indebtedness. The best way is to manage your money and increase your earnings or income potential.
At times, we make poor financial decisions which cause us years of undue stress. Once you have finally settled your debt, make a real change to the way in which you approach your financial wellness.
This is underpinned by being mentally and physically well. Think about it, when you are physically and mentally well, your medical costs are minimal, and you tend to be a happier individual.
The result would drive better decision-making, benefiting not only yourself but your family and loved ones, too. Set a realistic new year’s resolution, one that you can look back on a year from now and feel that you have really succeeded in reaching, one that makes a difference in your overall wellness.
Claire Klassen, Consumer Financial Education Specialist at Momentum Metropolitan.
*The views expressed here are not necessarily those of IOL or of title sites.
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