The National Credit Regulators (NCR) 2014/2015 Annual Report states that R4.25 billion in credit was granted by retailers in the first quarter of this year. South Africans are very willing to use credit to pay for even their daily consumables. As a result, 11 million South Africans are over-indebted, with payments three months or more in arrears.
As a new parent, avoiding the debt trap might be a challenge, with so many things needed for the new arrival. Expenses will increase, but many young people also expect to maintain their pre-baby lifestyle. It is often tempting to take out a loan or buy things on credit. The reality is that many South Africans are taking out second loans or applying for another credit card to service their existing debt, and this cycle can be devastating for a young family. Some simple business principles can help keep the focus on financial wellness.
There are a lot of things to consider when you start a family, and avoiding debt should be high on your agenda. Budgeting is key, and establishing mechanisms for saving, whether it be for retirement, your child’s education, or an emergency fund, should be done before the whirlwind of parenthood hits.
Renting things you feel you cannot live without – like a pram, or a widescreen TV because you will be home a lot more – is a good idea, as one of the benefits of this model is that you are not tied in and you avoid interest payments or paying for something you no longer need.
It may seem obvious, but consider reducing your current spending. Start planning and drawing up a simple budget that covers your weekly and monthly expenses. Monitoring these habits over a month or two will give parents an idea of where cuts can be made. Spending can be dramatically reduced upfront by limiting luxury purchases for instance.
Perhaps take another look at fixed costs, like short-term insurance or cellphone contracts and see how you can adjust those downwards. Plan to shop once a week rather than popping in for bits and pieces during the week, you will be surprised at how much you save by not dropping those extras in your basket. Your child will outgrow clothing constantly, rather purchase second-hand clothes.
With some items, it may seem as though there is no other option than to buy them – things like a cot, a feeding chair, car seats and prams. In the case of many young parents there isn’t access to large amounts of capital. Renting in this situation makes financial sense. Rent-To-Own (RTO) agreements are offered by companies like Teljoy and a wide range of baby paraphernalia is available. A rental agreement with a fixed monthly fee means you know what this adds to your monthly expenses, and you can opt to take ownership after the contract period.
But there are many aspects of RTO that makes this an attractive option when entering parenthood. You have the option to cancel at any time which helps if your financial situation changes suddenly, and you can also upgrade at any time. This flexibility is incredibly useful, especially for parents who might be expecting another child.
Once you have spending under control, and you’ve reviewed alternative financing options, it is important to start saving. With any new venture, especially parenting, there will always be unexpected costs. Not having a contingency plan for these events can be costly. Hospital bills can easily run into thousands of rands before you blink.
The best way to start saving is to pay yourself a set amount first, then pay for expenses. After this is done there will hopefully be something to put into a savings account, or into an investment. Being able to access capital to pay bills immediately is an incredible asset. At the end of the day, as a parent, you want to be able to pay for the best when the worst happens. Avoiding the temptation of multiple credit agreements is the best way to avoid spiralling debt.
* Marc Joubert is a registered financial planner.
** The views expressed here do not necessarily reflect those of Independent Media.
BUSINESS REPORT