Debt counselling

We live in a world full of material things. Some of which are very tempting to have in our possession. From frequent store specials to peer pressure, our financial and lifestyle goals can take a hard hit, if we are not careful. Some of us may not be aware of the reality of store specials. Store specials are a calculated marketing strategy to encourage us to spend our money. This strategy is usually used to sell outgoing stock to create more space in the store storage for incoming stock. In terms of business, a company driven by profit would cut storage costs to spend those funds on more goods to sell. Though unethical, some stores can change the price tag and add a discount sign to ultimately sell this outgoing stock at the same price as before the special. For example, a P40 discount on a pair of jeans that costed P200 would sensibly cost us P160 upon purchase. However, the unethical route a store may take is changing the price tag from P200 to P240, add a discount sign to still have us pay P200 upon purchase. Therefore, we need to take time to think about our purchase plans, especially during the discount seasons. Practicing a habit of making unplanned purchases have led some of into debt.

Our financial planning topic for this week is DEBT COUNSELLING. The word debt usually relates to credit which refers to the acquisition of goods right now with a deferral of payment to a later date. The concept of debt counselling is a combination of debt therapy and debt management.

Types of credit include: in-store credit accounts; credit cards; secured loans – personal loan, business loan, mortgage loan and vehicle finance from regulated sources; unsecured loans – short-term loans from unregulated sources; and bank overdraft.

Debt therapy

Debt therapy is a series of ongoing counselling sessions to discover the root of our debt. Same as with diseases, we must find a cure for the cause of our debt instead of treating the side effects. The reason behind finding the true reasons behind our debt will help us not find ourselves back into debt after overcoming our current situation.

Reasons why we get into debt include: undisciplined spending habits; peer pressure for an excessive lifestyle; mismanagement of funds; loss of income; retrenchment; unexpected medical costs; and poor advice.

Some of us may be in denial of our debt situation and debt therapy is where issues such as this are resolved. Debt therapy is a private matter therefore, all matters discussed are confidential. Many people have lost their lives due to financial pressures. And as family and friends, we need to stop taking these situations lightly. All of us have a part to play in the outcomes of our financial decisions. Accepting our debt situation and taking responsibility for our own actions are the first steps.

Debt therapy and debt management work hand in hand.

Debt management

Debt management is a process by which we actively pay off our debt. This stage involves the analysis of our budget, bank statements, spending habits, and so forth. The analysis our budget would show us if our priorities and needs supersede our wants. The analysis of our bank statements would show us our income, where we spend our money and if both aspects are in line with our budget.

Debt management strategies

·      continue to pay off our debt with agreed monthly debt repayments – and still commit to the initial contract

·      take back the purchased goods – but we still lose out on the previous payments we have made

·      strategic debt repayments – by paying off the debt with the highest interest rate first

·      debt consolidation – seek out more debt in the form of a large loan to pay off all other debt to leave us with only one debt to focus on

·      Insolvency or bankruptcy – where someone will be given rights over our assets and income in an effort to manage our finances on our behalf

Remember, the calculation of the monthly debt repayment amount is designed to keep us in debt longer. Therefore, the lower our debt repayment amount, the longer time we will have to pay off our debt. Another strategic debt repayment strategy is paying more than the agreed monthly amount to absorb future interest. Yes, we can pay back more if can afford it. This strategy would reduce our interest portion on our debt or loan such that we do not pay off interest on months that we have already paid for before its allocated time.

Debt free lifestyle

Upon the instance where we have fully paid all our debt, we can now be classified as debt free. Other strategies we can accommodate into our daily lives is to understand our spending habits, limit our credit cards to our affordability, and continue to regularly monitor our finances and other resources.

Unfortunately, our credit score or credit profile depends on whether we have used or use debt instruments. This score is what is used to calculate our interest percentage when we seek out debt or a loan. However, if we not have a credit score, another negotiation key to get a reasonable interest percentage when acquiring debt is by using our savings. Regularly saving a certain amount every month also creates a strong profile.

We need to be mindful that our current environment makes it easy for us to acquire debt for depreciating assets such vehicle finance rather than profit making ideas such a business loan. It is not a mistake that the system has been designed to make profit from keeping us in debt. Even if the car we purchased with debt breaks down, we are still liable for the debt repayments. If you find yourself in this situation, look back into your vehicle finance contract to see if there was an automatic insurance addition to fix your vehicle. The road to a debt free lifestyle is not easy but it is a possible. We still have the power to plan, work hard and exercise patience to ultimately achieve our financial and lifestyle goals.