ionas blog : debt

Iona: Why New Year resolutions don't work

iona — Mon, 11 Jan 2010 09:22:00 GMT

The great thing about social and cyber communication is that with little more than a few clicks of a keyboard you can wish your friends, family and colleagues well over the festive season. Gone are the days when we sat for endless hours writing out cards, licking stamps and standing in post office lines. While the internet and communication systems have extended our reach to people, the interactions have become somewhat impersonal. I think I received at least 5 or 6 types of generic greetings, and sheepishly admit to sending a few of them myself. The good thing that came out of this is the fact that one of the Facebook missives I received gave rise to the following story. It read ‘Happy New Year! May all your troubles last as long as your resolutions.'

The new year, a time of reflection and new beginnings for many, or at least an attempt at new beginnings. As we are all painfully aware, New Year's resolutions last as long as it takes to get over the hang over. If you really think about the whole idea of year end resolutions, they do not hold any more power than a decision to make a change at any other time of year. Still people make them thinking that the 1^st of January is a magical date that will materialise their dreams. Come February they are still smoking, eating fatty foods and competing for the couch potato of the year award.

New Year's resolutions don't work for a number of reasons. They are often about what you think you should do, but that's where they end-in thought. So if you have resolved to get out of debt, thinking about it, posting it on the fridge, and announcing to everyone who is in earshot, that you will be rolling in cash by next January-without a plan of action, you will set yourself up to fail.

A resolution is really another word for a goal, it is about achieving something. The trouble is that setting goals without an action plan rarely works. Simply stating a goal without motivation, commitment and a plan is a waste of time.Resolving to get out of debt and just after you have spent yourself into oblivion over Christmas is not the best timing, for obvious reasons. The most significant obstacle is the fact that you will probably not have the necessary cash flow to achieve your goals. The frustration of not being able to get ahead may cause you to abandon the goal all together.

This should be a time of some serious planning. Sit down and work out what bills you will need to pay in the next few months. Scrutinise your spending to make sure that you are not wasting resources then try and pay off as much debt as possible. If you are stretched to the point where you can't cover your bills, reduce your payment but do not simply stop paying. As your cash flow eases catch up with any arrears you have on your accounts. Do not avoid phone calls from creditors, tell them about your plan and stick to the promised payment.

Only once you have your commitments under control can you start looking to the future and make some plans to avoid the same scenario in 2011. This is a good time to look at other resolutions that may help your quest. For example the decision to stop smoking or drinking can free up R500 in your monthly budget. The tradition for the new year is to write-out goals for ourselves.

If you are going to commit your goals to paper write them goals as "I am" statements and write dates indicating when you want to achieve the goals. Try and adopt a positive mindset, so instead of thinking ‘I am doomed if I don't get my finances under control, think ‘I am looking forward to the day when I have no more store accounts to pay off'. Putting a positive spin on things will keep you moving forward and relieve stress.

Your Question

I really want to clear my debt this year but it seems that I just cant get enough money together to do this. How does one get to the point where you can pay extra cash into debt when you are struggling to make ends meet?

Iona Says: Many people believe that they have no extra cash in their budgets however they hold onto luxuries that use up large chunks of money. For example cutting out DSTV, and reducing weekly visits to restaurants can save as much as R1000 per month. Once you really commit to getting out of debt and you are prepared to make short term sacrifices, you may realise that there in fact is enough money in your budget to achieve your goals. Small savings in many areas add up to significant amounts if you are disciplined.

Every year I make the resolution that I an going to pay off all my store credit cards but I never achieve this goal, any suggestions on how to do this.

Iona Says: The first thing you need to do is to make it difficult to access the cards. Your best bet is to cut them up. Then you need to allocate funds to paying them off one at a time (while maintaining a normal payment schedule). Choose the one with the least amount of debt. If the payment is R200 per month try and find some extra cash in your budget to add an extra R100 per month. This can easily be achieved by being smart about grocery shopping or using your cell phone less. Once you have paid off the card, target the next one. Add the R200 that you were paying on the other account, plus the R100 you found in your budget to the next card. Keep doing this, using the savings from each paid account for the next one. You will be astounded at how effective this is. The other thing you need to do is to stay away from the malls so you will not be tempted to spend.

Iona Minton: Avoid the Christmas Debt Trap

iona — Tue, 08 Dec 2009 09:08:00 GMT

Christmas revelry and soon to be ignored New Year's resolutions are almost upon us again. It seems like just yesterday that we were nursing the consequences of our overindulgence in 2008. Overindulgence does not only come in the form of eating too much turkey and sipping one too many Eggnogs. It also means putting strain on your credit cards and your budget. Over the festive season we often throw caution to the wind and spend ridiculous amounts of money on gifts and baubles that we don't really need. To make things worse we incur this debt at a time when many other demands are placed on our budgets. January is the time that we have to come up with the cash for school fees, insurance policy renewals and holidays.

The last few years have seen us buckling under the weight of high interest rates , so we may be faced with the prospect of a frugal festive season. If you are really stressing you should have a heart to heart discussion with your family and friends to explain your situation. Those who care for you will not be offended if you have to skip buying presents this year. Use the savings wisely and make a determined effort to get out of debt. If you do have some cash spare here are some tips for having a great Festive season without breaking your budget.

1. Plan what you want to spend on each person and sick to it.

2. If you have a lot of nieces and nephews in your family circle consider pooling resources. Consider budgeting chipping in R100 for each child so they will each get one decent present instead of 20 cheaper items that break in a few days.

3. It's a little late now but this will be good for next year, start shopping a few months before Christmas, not only will it spread the cost over a longer period but it will be easier to stick to your budget if you are not rushed.

4. Avoid those impulses, wait a day or two before you buy an unplanned or unusually expensive item and question your motives for buying it.

5. Have a long hard look at the people you have chosen to be the recipients of gifts. If you have a lot of "I shoulds" rather than "I want's" your motives are wrong. Try to figure out why you feel obliged to buy something for these people. If you are doing it out of guilt or you want to impress someone, it's not going to win you any points. A frank talk and a well- worded card can save you a lot of money and result in a better relationship.

6. If you have out of town friends or family staying with you, you are perfectly within your rights to ask them to chip in for groceries. If they are relying on you for transport they should not object to filling up your car once or twice. Remember they are getting their accommodation for free, if they had to stay in a hotel it would cost them at least R600 per day.

7. Get into the habit of shopping at the post Christmas sales for the following years gifts. Many shops have great bargains and often cut their prices by as much as 70% to clear their old stock. If you have nerves of steel and are disciplined, shopping a day or two before Christmas can yield similar results. As Christmas draws near and the shop does not sell enough stock they will discount certain items.

8. If aunt Ethel's silk scarf cost less than expected do not use the savings to buy a more expensive gift for someone else, save it! There are always unexpected expenses at this time of year so it is a good idea to have some reserves.

9. Not all presents have to cost money, a gift of your time can be very valuable. Offer your help with a home improvement project or baby sit for friends of family to give them a weekend break..

10. To cut the costs of the Christmas dinner get each family member to contribute one of the dishes. A festive dinner could easily cost R1000 so don't be shy about asking for help.

11. If you need something for your home like new carpets or electronic goods, you could arrange with your spouse to buy the item as a joint gift to each other. It sure beats another pair of socks or cheap cologne. Not the most exciting but its sensible.

12. If you have a little more money than the average person and you are wondering what to buy your older kids, why not invest in some unit trusts or Satrix shares for them. This is the only present that actually gets more valuable with time.

13. If you have school age children who want to buy their friends presents you often end up footing the bill. Get together with the other parents and organise a Christmas party where they can each buy and wrap a gift of the same value and choose one out of a communal box. This works well in a family situation where there are lots of cousins.

You can avoid the Christmas debt trap, but it will take resolve, a little soul searching and a lot of planning. Why don't you give yourself a real present this year and celebrate January 2010 with no Christmas debt and maybe even a positive balance in our bank account.

Your Questions

I have two boys aged 11 and 13 and they want gifts that cost a small fortune, one wants a Wii and the other a new Play Station and . They have an older model play station but they want to be able to go online to play games. I just can't afford this. I can't bear to tell them no, but this would mean using my already stressed credit card.

Iona: Its time for a heart to heart. Explain to them that you have limited funds and paint a picture of where the money goes each month. Tell them that you need to save for the time when you can not work. Also explain to them the consequences of using debt to buy items like this. They can make do with the play station they have and perhaps consider getting them a Wii to share. Ask family members to chip in with some cash towards the Wii instead of buying them individual gifts. Work out what you spend on their clothes pocket money and entertainment and tell them this is your budget, and ask them ‘what shall we cut in order to afford the games'? It will make them realise that you can't print money.

My wife's sister, husband and her 4 kids are going to spend a week over Christmas with us and they never contribute a cent towards food. My wife is uncomfortable about asking them. How can I do this diplomatically?

Iona: There is no need to be diplomatic; they are taking advantage of you. When they arrive simply tell them in a friendly way that you estimate the grocery bill to be X this week and their portion of it is Y. You can tell them that they can either give you the cash up front, or they can do the grocery shopping. They will not balk, how can they? It is totally unreasonable to expect you to carry them for a week. If they do not come up with the cash, just don't go shopping four hungry kids will eventually drive them to the grocery store.

Iona: Dumb things to borrow money for!

iona — Tue, 10 Nov 2009 06:11:00 GMT

A few months back I visited a luggage store looking for a new briefcase. After deciding on my purchase I went to the counter to pay. Next to me was a woman who was buying a handbag. The clerk read the price to her with a slight quiver in his voice, it was a cool R12 000. After digesting this, the next shock wave came when she asked for it to be put on her budget facility for 24 months. Curiosity getting the better of me I commented that it was a nice bag, hoping that she would reveal more about the nature of the purchase. She complied and told me the bag was not for her but it was a peace offering for her mother in law, as she had lost her temper in an argument. I then asked her in a light-hearted way, what the next peace offering would be, a Ferrari? She contemplated this for a while and while her mind was ticking over I asked her what happened to the days when a bunch of flowers and a card sufficed as a sorry. This question brought her to her senses and she declared you are so right and cancelled the sale.

This is an extreme case of credit card madness but we routinely finance items that we can ill afford. While credit can be a fantastic tool used wisely, it can be a ticket to the poor house. There are a number of things that should never be financed but perhaps the items that can do the most damage to your budget are perishable goods like groceries, luxury purchases and eating out.

If the financing of perishables is a habit rather than an anomaly, this habit could be costing you your retirement. The designer coffee and muffin at the deli will long be digested long before the debit hits the bank and the magazine you bought to while away your lunch hour will have already been handed over to a doctors waiting room by the time you pay the first instalment.

The reason so many South Africans are in financial difficulty is because they are using their credit cards to fund their day to day lifestyles, purchasing things that they could not ordinarily afford. If you feel that your debt or spending is out of control have a good look at your credit card statement and examine the purchases you make. If you see that you are financing things that you really don't need then it's relatively easy to adjust your spending.

Other items that fall into the category of lifestyle spending are jewellery, electronic items and gadgets.

There is no way to justify a jewellery purchase if you have to finance it. It will not add to your quality of life, not is it a good investment. If you pay R20,000 for a diamond ring in a retail store and tried to sell it the next day you would be lucky to get half the cost back. The reason for this is that you are buying it at retail prices. There are a string of middle men adding their costs before it gets to the shop window. Don't be fooled by the insurance values either, that is the retail replacement cost, not the real value. Look for cheaper alternatives, costume jewellery is hard to tell from the real thing and unless you are hanging out with diamond experts no one will be the wiser.

Its great to have the latest cell phone with all the bells and whistles but the large majority of people use a fraction of the accessories. The same applies to laptops and cameras. If you only need a laptop to write emails and access the internet buying one with a terabyte of memory and programmes that could run the Whitehouse is just a waste of money. Again if we are using credit to finance the brag value of a cell phone or a computer we are just throwing money away. While it may be a stretch to view electronics as perishables jut take a look around your home and count how many gadgets you financed are now gathering dust. These electronic relics have a hand in your debt situation.

South Africans are sociable beings and love a good night out at a restaurant. Dinner for two at a half decent venue can easily set you back R250. If you do this once a week you are spending a R1000 per month. Add this to the items you routinely charge to your cards and you are looking at a heap of finances charges. While it is convenient to use a card in restaurants, the balance should be settled at the end of each month in order to avoid interest charges. The bottom line? By all means take advantage of the convenience of credit cards but don't use them to finance a luxury lifestyle that you cant afford.

YOUR QUESTIONS:

Q: My boyfriend and I are getting married next year and we are going ring shopping. He wants to finance it on his credit card but his limit is R20,000 but the ring costs R30,000. Should he ask the bank to increase his limit or would it be better to take out a personal loan.

Iona: The answer is neither. You should perhaps look for a ring that fits into his budget. Some wedding planners say that the ring should cost as much as one month of your partners salary. This is a totally arbitrary figure, probably set by a bunch of conspiring jewellery store owners. Ideally a ring should be bought for cash or at most in three interest free monthly payments. Getting into so much debt for a ring is not a smart move. Young couples have a battle ahead to buy a home of their own. Starting out married life with this debt can put you at a disadvantage. A ring is a token of love and commitment, big or small the meaning is the same. R30,000 finances over 24 months on revolving credit at an interest rate of 25% is per month. There is also a good chance that you will both be funding part of the wedding so you can add another to your bills. Setting up home is an expensive exercise you need as many resources as you can muster. If you both feel you want a large expensive ring agree to buy it on your 5^th wedding anniversary when you are a little more established.