The current statistics from the Reserve Bank and the National Credit Regulator are really grim. They show South Africans to be among the most financially burdened people in the world with 11 million of us categorised as “over-indebted”, 10.5 million having impaired credit records and 3.79 million accounts in arrears for three or more months. The average debt per credit active South African is R69 750 so it’s no wonder that the latest MMI Consumer Financial Vulnerability Index places the nation in the ‘Very Exposed’ category in terms of our finances.
I know that feeling. When I started my career in 1994, as a 23-year-old in Queenstown, my first income triggered a spending spree which included the purchase of a brand new BMW 325i. I hadn’t realised that my income stream was seasonal and would dry up completely in the long holiday months.
So I do understand why the response in the current tough climate is to treat all debt as toxic but this blanket stigmatisation of debt is potentially extremely unhealthy.
The right kind of debt, used correctly, remains one of the great economic liberators both for individuals and for communities. It was the access to the formal lending sector that most black South Africans gained for the first time in the 1990’s which triggered the explosive growth in the middle class and lifted living standards across the nation.
We need to remember that good debt still has a role to play in every income earner’s life because it has the potential to generate wealth and financial wellness
In short, good debt involves borrowing money to build assets or to enhance income. It takes you forward in life. It should be affordable, from a reputable provider and part of a proper financial plan constructed with the help of a qualified adviser.
Investment in property. Very few people can afford to buy a home without a loan and yet doing that is probably the surest way to secure an asset base for your family and to move up the economic ladder. Property is not a guaranteed investment, and should be approached with care, but since 2009 properties under R600 000 have increased in value by at least 33%, which outpaces interest on savings, salary increases and most business profit curves. Property, with the proper planning, can also be a generator of rental income.
Funding education. This is a deferred benefit which will usually reap rewards in the long-term for the next generation. Even in the current challenging climate for graduates, statistics show at least a 20% higher chance of being employed with a tertiary qualification, so a measured amount of debt to fund good secondary and relevant tertiary education has real merit.
Buying a vehicle. Investing in a good value, appropriate car or bakkie can save on commuting costs and might make better jobs more accessible. The vehicle can also become an income earner in its own right.
Getting into business. Even the smallest enterprises involve purchasing some assets or stock and demand a ready cash flow and almost every successful business person has used loans of some kind to get going or to get growing to the next level. A detailed business plan, built in consultation with experienced people, is essential before taking on such loans.
The bad kind of debt, to be avoided completely, is anything unaffordable or carrying punitive interest rates. It is also inadvisable to use debt to fund day-to-day survival needs like food, rent and clothing – it is far better to lower your expenses than to raise your debt burden without a commensurate improvement in income. It’s best to resist the temptation to use debt to indulge a ‘want’ (expensive cell phones, top-of-the-range cars and home electronics) rather than a genuine need.
So, back in Queenstown in 1994, my decision to take a loan to buy a car represented a form of good debt because I needed a vehicle to do my job and to improve my income. However, buying my expensive dream wheels, fresh off the production line was an example of bad debt. Perhaps a decent second-hand Corolla would have served me just as well and I would’ve been able to manage the significantly smaller repayments when my income dipped.
Khanyi Nzukuma is Chief Executive Officer of Metropolitan Retail