Cape Town – The high cost of living combined with a lack of financial literacy contribute to the debt trap in which many South Africans find themselves, says a financial expert.

Saving isn’t really much of a feature in the SA personal finances landscape, but debt certainly is, as South Africans spend three-quarters of their monthly income on repaying debt.

The high and spiralling cost of living also doesn’t help, and to many people who are just trying to survive, personal loans and unsecured debt seem the only way to go, according to Hannes van den Berg, CEO of Momentum Consult. He adds that any person who does not follow a personal financial plan is susceptible to the debt trap. He also mentions that careful planning is needed for life-changing events, such as getting married or having a baby.

Added to the high cost of living are increased interest rates and increased inflation. It comes as no surprise that only 15 percent of South Africans have enough money to retire comfortably.

The issue of financial literacy is a crucial one: many people who buy appliances on HP do not understand how much more this is going to cost them in the long run.

Van den Berg mentions common warning signs of over-indebtedness: excessive spending patterns, consistently overdue account payments, and having new finance applications denied.

Here are the four common factors that contribute to the huge debt levels of South Africans:

  1. Lack of financial literacy – proper budgeting and financial planning knowledge leads to consumer not differentiating between needs and wants).
  2. Spending patterns exceeding income – making purchases beyond your affordability range (E.g. keeping up with the Joneses, using the credit card for wants and not needs).
  3. Emergency and unplanned expenses – such as a new baby on the way, or medical emergencies.
  4. Survival – the cost of living exceeds income and getting into debt seems like the only solution (e.g. personal loans, unsecured loans as a short-term measure).

Being disciplined will help you find a balance between ensuring quality of general living and paying off debts, he says.

Some solutions from Van den Bergh on dealing with debt:

  • consolidate your debts
  • pay off the debts with the highest interest rates first
  • scale down your lifestyle to a level of affordability
  • be realistic and learn to differentiate between your needs and your wants
  • Pay yourself first (a savings plan, or a retirement annuity or even your medical scheme contributions

Van Den Berg acknowledges that “home loans, student loans and reasonable car repayments are acceptable and often unavoidable debts. But even with these consumers need to be mindful of what they can actually afford, as each person’s situation is unique”.

(Based on a press release by Momentum Consult)