Laying the foundation
Hey there! it’s me again, the Journey-Man and I’m still taking a good look at basic personal finance so that we can lay our foundation.
This is the second part of the back-to-basics leg of my journey. In the first part of getting back-to-basics, I covered some important things we need to do to start sorting out our finances. If you missed anything about financial basics you can read the post again. This time around I want to look at where we need to go next.
Once you know what you own, what you owe, what you earn and what you spend, you can have a good look at your debt situation.
This may hurt a bit but you’re going to feel so much better once you’ve faced this demon.
Good Debt vs Bad Debt
We mentioned previously that you need to distinguish between your good debts and your bad debts. This is a pretty simple (but really important) thing to do. You want to kill the bad debts as quickly as possible. Bad debt is the silent cancer, eating away at your future finances, robbing Future-Me of joy.
Basic Personal Finance : What is Bad Debt?
Bad debt is any debt that doesn’t build your wealth. A good example of bad debt is credit-card debt. Credit-cards are rarely used to finance anything that will increase your wealth. On top of the fact that we use credit cards to pay for things that we don’t need and can’t afford, interest rates are extremely high.
An expensive habit
Bad debt is a very expensive habit. But don’t take my word for this, take a moment to consider the following:-
“Credit card debt in South Africa is so expensive its costs dwarf any benefit of saving for people who are paying off their cards.” [source]
“Assume a scenario where you have credit card debt of R80000, you can only afford to pay R2000 a month towards this debt and you do not make any further purchases. It will take you almost six years to pay it off at a typical annual card interest rate of 20.75%. By the time you have paid off your credit card debt, you would have paid about R57250 in interest – 72% of your original credit card debt.” [source]
“Although the numbers indicate that it is best to pay off debt first, if you follow the typical consumer behaviour you almost never get to saving.” [source]
You need to kill bad-debt as quickly and aggressively as possible.
You need to know the interest rates involved so that you can calculate the best debt reduction strategy. Mathematics would suggest that you pay the debt with the highest interest rate first. There are however reasons that you may not want to do this. You may, for example want to set up a (small) emergency fund up first so that, when things go wrong you have some margin.
On my Journey I’ve realised that one of the most powerful, confidence building and positive things I did was to start an emergency fund. Once I had that small margin in place, I realised that I wouldn’t be stopped in my tracks every month when the unexpected happened.
So I first started a small emergency fund, then attacked my debt, then upgraded that emergency fund.
Don’t miss the basics
We are really dealing with basic personal finance here. Hopefully you won’t miss the importance of knowing the basics and implementing the basics.
If you act as most consumers do in South Africa, you will continue to service expensive debt. You will never get to saving. The research into South African consumer debt shows clearly that we are so consumed by debt that we’re not likely to ever get to saving.
With basic personal finance knowledge, you can change that. You.
Today I want to end off with some encouragement. The fact that you have read this, the fact that you have taken the time to consider what I have written, is an indication of your desire to succeed. You need to know what basic personal finance knowledge (and action) can do for you.
I want to encourage you to feed that desire with ACTION. Get out your debts and get to know everything about them. This is a war and you have an enemy, get to know him so that you can defeat him.
The knowledge you gain when attacking your current debt will will help you with future temptation to take on more debt. When you know and accept the truth, that debt is an addiction and that it has probably become a disease in your house, you will be far more hesitant to simply pay for something on credit.
Basic Personal Finance – A Quick Summary
Here is a quick summary of the basics we have dealt with in these two articles:-
- Know your position (assets, liabilities, income, expenditure, debts)
- Analyse your debt (good debt vs bad debt)
- Create some margin (small emergency fund)
- Kill that bad debt!
- Create more margin (larger emergency fund, other insurances)
Once you’ve dealt with these things you may end up in a position to start saving. You may then look at ‘investable money’. Once you have ‘investable money’ you can start building through automatic savings.
We are going to get to all of that on this Late Starter Journey.
You can do this
It may seem a world away, particularly if you have mountains of debt, but when you attack the financial problems with the basics you should see progress. Once you start making progress and you understand that saving and investing is achievable – you can become unstoppable!
This is a long journey we are on. It may take months or years to reverse your negative financial status – but you need to be in this thing for the long-haul – you can do this thing!
That is my hope. I am Journey-Man.
Working hard, walking hard and taking drastic action. Not just for myself, but for my kids and the next generation of Journey-Men and Journey-Women.
Please remember that I am not providing any financial advice here. If you are unsure of the best way to attach your bad-debt you should consider talking to a Financial Service Provider.