Staying out of debt

In today’s world, many young people use debt to live what they think is the easy life, buying unnecessary items to keep up with the latest trends, partying, and taking out loans to pay off racked up bills.

Xavier Neidel, an accountant at Nedbank, explained that many people don’t know what debt is and end up in debt without realising it.

Debt is money owed to a person or entity that must be paid off by a deadline. Student loans, car loans, medical expenses and credit card balances are types of debt.

Neidel highlighted although there might be high levels of financial worry amongst young people, they are comparatively unlikely to seek support.

“In my opinion, young people get into debt because they lack knowledge of financial discipline while exhibiting poor financial planning skills, which stems from a lack of financial literacy. People living above their means is also a major reason why many youths end up in debt. They then go further into debt to sustain their lifestyle, and never get out of debt,” he said.

“Sometimes people are forced into debt due to unexpected expenses. That’s why it’s important to have savings that you can use for unplanned expenses, because it's easy to see the money came in one lump sum - but without discipline, it leaves quicker in many transactions.”

According to Neidel, another reason young people are getting into debt is from student loans. “Some students jump from school to school, unsure of what career they want to pursue, and some jump from school to school using financial aid to obtain the luxuries they couldn’t normally afford.”



How much debt is too much debt?

At some point in one’s life, it's likely that you'll have debt. But it’s important to know when you have too much debt and what you can do about it.

According to Melbic Car Rentals accountant Nicole Paremore, if more than 30% of your income is used to pay off debt, then it’s too much.

“Not all debt is bad debt. The difference between good debt and bad debt is that good debt offers long-term financial benefits to you, whereas bad debt hurts your finances.”

Good debt is the use of borrowed funds for purposes that provide lasting benefit, under fair repayment terms that are within your means and that you can reasonably expect to meet. Examples are student loans, house loans or business loans.

Debt is officially classified as ‘bad’ when you are spending borrowed money on consumables, payments are missed and the account goes into arrears.

‘Bad debt’ can also refer to unnecessary debt that does not increase your wealth in the long-term - an example could be a retail store account.



How to stay out of debt?

If you struggle with getting in over your head with debt, paying it off and then ending up with even more debt later, here are a few steps you can take to put your repeat-offender status away for good.

Part of getting and staying out of debt is learning new money habits, which help one stay out of debt in the future.



• Tackle your debt in baby steps.

• Pay off your highest-interest debt first, then work your way down from there.

• Emergency savings are very important for those “just-in-case” situations. Best practice when trying to establish an emergency fund is to have at least six months’ salary saved up. This will be something to cover your expenses if you lose your job, have an injury that prevents you from working, or for when you need money for an unexpected issue.

• Get a side hustle. You need to at least two streams of income. Having a solid budget is a cornerstone of how to improve your financial health. But getting that budget in place can be a challenge when money is tight, and it’s a struggle to make ends meet each month. A side hustle has the potential to bring in extra income, creating a little wiggle room in your budget.

• Draw up a budget and stick to it (Remember to always live within / below your means). It’s important to avoid overspending. Cut out the wants and focus on the needs. There's always room in your personal budget to cut out unnecessary spending habits. This could be going to ‘Taco Tuesday’ at your favourite restaurant only once a month, or cutting down on your online shopping.