A South African perspective - Calculations might differ with other currencies but the end result is the same - Income might be lower or higher but you live according to your income and the banks are just helping to compound the problem.............
A lot has been
written and spoken about the subject and various ideas and words have
been added to it. The fact is that Debt
and the application thereof has been the undoing of people since time immemorial
.
Debt is like
any addiction: It is very hard to let it
go or to get rid of. There are all sorts
of methods employed to rid you of the illness. But like everything else people
get addicted and nothing helps.
The
exception proofs the rule: The few that do eventually get out of it shows that
the majority never will. There is only
one way to get rid of debt – permanently – and that is to never get into it.
It should be
a compulsory subject in schools – “How to survive without debt” or “living life
free of debt”. A name for it is
irrelevant – the outcome is all that matters.
Let us have
a look at debt: In today’s world it
means to borrow money from a bank or other willing money lender. It is to be
repaid over a specific period in the future and you will be charged a fee on it
called “Interest” This can be a specific
amount or a percentage calculated on the original or outstanding amount –
normally regulated by some law. If you are late with payments or skip a payment
additional interest is added and as a rule this accumulates. (Or is compounded) That and the method applied initially to calculate the interest is why it is called
compound interest.
Now enters
the banks – They have to lend out money to survive – there is no other
way. They will lend you money based upon
a set of rules which not even they understand – the following example is based
on these rules.
It is
absolutely essential that the reader understand the basics of this and I am
going to explain it with a simple example.
Family of 3 –
one child going to pre-school
So
.......you earn a salary of R20 000 and clear after tax R 18000
The bank has
decided to give you a home loan of R 600 000 over 20 years at an interest rate
of 10.5% per annum. Your repayment is R 6000 per month of which R 5250 is
interest
They also
finance a car for you costing R150 000 over a period of 60 months at an
interest rate of 14.5%. Your repayments
are R 3526
Interest
portion is R 1812.50
Total
interest portion of these two purchases is R7062.00 (Month one)
This is just
over 39% of your Nett monthly income after tax.
( Oh yes
actually 41.5% if tax is calculated correctly)
So between
the taxman and the bank you have spent 50% of your income on interest and tax. And you still have to live.
Cash flow of
course is another story – debt consists of capital and interest.
Your monthly
debt repayment on these 2 debts alone amounts to R9526 per month which leaves
you with on R8474 per month to live on.
What else do
you have to pay for ? That is the big
question – and I am going to be very lenient in my calculations:
1. Medical aid R2000
2. Telephone R200
3. Fuel R
1200 (About 1200 kilometers per month or
40 per day)
4. Clothing R 300
5. Food R3474
6. Gym R 200
7. Dstv R800
8. Eating out R300
Total of R 8474
The following has not been provided for : Life assurance, Car insurance, Emergency
fund , school fees, and a few others.
The only place where this can be deducted from is food – and a family of
3 will not be able to survive on R3474 per month.
Corrections to be made : Tax for this bracket is R 2940 per
month – oops another
R 940 to be deducted somewhere
Medical aid : Chances are that this will be in the region of
R 2500 Plus - oops another R500 to be deducted somewhere.
Pre-school fees R 500 per month – Oops Oops .............
Suddenly this family is left with less than R 1500 per month
and no insurance has been paid for and there is no emergency fund and ...wait
for it no food yet.
O yes and then there is rates and taxes, water and lights.
The problem is that when the bank considers these loans they accept the figures clients give them and they recklessly approve the loans and will not have one sleepless night about the consequences.................
I dare any bank to differ with me. And yet they will finance these people if they
have a clean credit record to more than the amounts I am quoting here .
Here is my final verdict : No matter what banks say they are
recklessly endangering the financial future of
consumers especially those that do not do their homework on their finances
before signing on the dotted line. And
the wolf is waiting patiently – sometimes not so patiently.
