13 Nov Debt and Financial Wellness: A Comprehensive Guide

Understanding financial wellness is vital to creating a prosperous financial future. When you understand what constitutes being financially well, it’s easier to make better choices about how to spend your money and how to build a good credit score, manage debt, and save.

Credit Boost defines financial wellness as being in good financial standing–not having unmanageable debt, an excellent credit score, an emergency fund, and a budget that allows for discretionary spending.

This post discusses how to build and maintain financial wellness in the context of debt.

Let’s get to it!

Debt and Financial Wellness

Too much debt can spill into your monthly budget, making it impossible to manage everyday expenses like groceries, utilities and insurance. Here are some tips to manage your debt efficiently:

• Make sure no more than 20% of your total income goes towards repaying debt.
• Pay off debt with the highest interest first (usually store and credit cards) using the avalanche method. This will ensure that you don’t incur unnecessary further debt.
• Budget for debt and minimum repayments.
• Don’t use credit to buy things you can’t afford. Rather, buy things you need, like groceries, on credit and repay the balance in full at the end of the month. This will build your credit score and create a positive payment history.
• Don’t take out payday loans. These often command exorbitant interest and can exacerbate bad financial standing.

In summary, don’t spend too much on debt and don’t take on more debt if you can’t afford it.

Good Debt vs. Bad Debt

Did you know that there’s a difference between good and bad debt? Good debt is credit taken out for things that appreciate or don’t quickly depreciate. For example, buying property is good debt because property increases in value. Taking out vehicle finance is good debt because you’ll use it every day and it steadily depreciates over the years.

Bad debt is debt that you can’t afford or for things that quickly depreciate in value. For instance, buying the latest TV set when a new model will come out a year or so later. Another example of bad debt could be using a store card to buy the latest fashions.

How Much Debt Is Too Much Debt?

A key sign of having too much debt is when your repayments impede your ability to afford living expenses or make minimum payments on other credit. Transunion recently released their Q2 2024 consumer credit summary, which reports that the average South African owes:

• R24,323 on their credit card
• R31,299 in personal loans
• R 242,565 on their vehicle
• R660,249 on their bond.
• R 2,277 on their clothing account

If you owe more than the average amount, you’ve likely taken on too much debt. Consider debt counselling, the all-in-one solution to asset repossession, high interest rates, unmanageable repayments, and legal action.

At What Age Should I Stop Taking on Debt?

There are certain types of debt you should avoid taking on once you reach a certain age, in the interests of your children, dependants, and blood relatives.

For example, don’t take out a 20-year bond at the age of 50, as the average age of death in South Africa is 64. If you pass and your debt is unpaid, your dependents or children will inherit your debt.

It’s also a terrible idea to take on debt when you’re a pensioner. Debt repayments can quickly eat away at your pension, leaving you in a tricky financial position, especially if you’re too old to work.

To maintain financial wellness, consider taking out life insurance or disability insurance. This way, if you die with debt, your insurance will settle it, mitigating your debt’s impact on your loved ones.

If you need help managing over-indebtedness, contact Credit Boost. We can help you reduce interest rates and repayments, ensure you’re protected from legal action and asset repossession, and help you become more financially literate.