Young and heavily in debt

The South African youth is more in debt than ever before; yet they continue to live large. By Trevor Crighto

You made it through university, you’ve got a job; and now you’re getting a regular salary. The temptation to spend your money on looking good, being seen at the coolest clubs and driving the latest car is overwhelming. That’s why so many young South Africans are finding themselves in debt, despite earning decent salaries.

The Old Mutual Savings and Investment Monitor shows that debt levels are at their highest since 2012, outweighing savings for the first time since the report’s initial assessment in 2011.

Lesego Monareng, a certified financial planner for Old Mutual’s private wealth management, believes that social media plays a role in driving young people to spend heavily on glamorous lifestyles. “It seems as though young people allocate a good portion of their available resources to their image – that is hair, make-up, expensive clothing, bags and shoes, as well as cars and being seen at the right places,” she says.

Luke Martins, a financial planning coach at Old Mutual Wealth, agrees. He says most young people have debt in the form of student loans, or are paying off their first car at the beginning of their careers. “But, they . are still not willing to compromise on the kind of lifestyle they think they should be living,” Luke says.

Old Mutual’s Monitor shows that young people are less optimistic about the future than before. There has been an increase in ‘informal’ saving, such as stokvels, among the black youth, as well as an overall increase in personal loan uptake. Only 38% of young people contribute towards pension or provident funds, with 50% of those surveyed, still living at home.

According to Luke, research suggests that young people change jobs more than previous generations. He explains that sometimes this is caused by the need for a higher income to fund their lifestyles. “That same attitude can be seen in the management of their finances. It is common knowledge that South Africans have a poor saving culture. This is most evident in young people who prefer instant gratification,” he says. “This has led to people living beyond their means, without compromising a certain lifestyle and therefore spending on credit cards and getting further into debt,” he adds.

The report illustrates that the incidence of personal loans is on the increase – whether from financial institutions, micro-lenders or friends and family. While a loan can help keep the wolves from the door for a little while, in reality, it’s just another debt that consumers are incurring.

However, it’s not just young people who are overextended. Debt Rescue CEO, Neil Roets, says nearly 48% of all credit-active consumers in South Africa are considered to be over-
If anything falls outside your budget, don t be tempted to buy it; even if it’s payday.

indebted. This is based on the fact that they have one or more credit agreements that are at least three months in arrears. “Statistics show that the average consumer has 14 unsecured accounts, one vehicle and one property loan; and this figure is increasing annually,” he says. But, the problem with young people being part of the equation is that they’re starting off their working lives in debt. This paints a frightening picture of what the rest of their lives will look like, unless they take steps to correct it.

Luke says that avoiding temptation plays a role in helping to escape debt altogether. “Learn to say no, and be content with it. Resist the need to take out a credit card or store credit for the first three years of your career. You will be amazed at how you learn to cope without them, and instead develop good saving habits,” he encourages.

If you eventually get a credit card, don’t buy anything that you can’t pay off within three months. Being a smart consumer is another step towards avoiding debt. “You cannot avoid the need to buy good-quality clothes for work, so look for good deals, ask for a discount and buy clothing that is functional; not necessarily fashionable. Most importantly, budget!
If anything falls outside your budget, don’t be tempted to buy it; even if it’s payday. Save first, don’t spend first – it’s a good habit to get into in order to delay instant gratification,” advises Luke.

If you find yourself in debt already, there are steps you can take to address it before it’s too late. “The first thing is to get rid of the habit that got you into debt. Cut up your credit card or lock it away until you have settled the debt. If you have store credit, once you have paid it off, cancel it,” says Luke.

“Work out a budget, and service your debt the moment you get paid. If you have extra money left over at the end of the month, pay off more of the debt. With short-term debt, the interest rate is so high that it’s best to service that debt as a priority,” he adds.

Lesego warns that there are different kinds of debt – generally classified into good and bad debt. “Good debt assists you in purchasing an asset that will ideally yield a profit in the future, such as a house; or one that will generate income, such as a business,” she says. “Bad debt has high interest repayments that you are unable to reduce over extended periods. It results in a compounding negative effect and causes emotional stress.”

Finally, the role of a financial advisor in helping structure savings and investment strategies is not to be underestimated.

“It’s difficult to fulfill your dreams and aspirations without sound financial planning. Young people have the benefit of learning from the experiences of others, and have access to the power of compound interest, as time is on their side. The best investment in your future is a sound financial plan in partnership with a good financial planner,” Luke concludes.

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