Most of us suffer from financial stress from time to time, typically when expenses exceed income. Of course, many are in this stressed state permanently. The causes are numerous, from a lack of job opportunities to societal pressures, but there is one thing that amplifies stress to unbearable levels – debt.
Remember what they say about the magic of compound interest on investments? With debt, it works in reverse. If you don’t repay at least the interest amount each month, your debt will compound. And when you have entered that downward spiral and your debt repayments consume such a large portion of your income that you can no longer afford the essentials of food, shelter, and transport, you are in serious trouble.
This week, debt counselling firm DebtBusters released its annual Money-Stress Tracker report, based on a survey of 27,000 subscribers to its website, conducted in May and June. These are not people in debt review, but who have an interest in the financial information on the site, and therefore, it is fair to say, may have debt problems.
The survey found, along with other recent consumer surveys, that South Africans are generally more positive about their finances than they were a year ago. Although the economy is still sluggish, interest rates have declined slightly, inflation remains low, and loadshedding is a non-event, at least for now.
Yet South African consumers continue to be overburdened with debt, and it appears that the slight easing of interest rates has not improved the situation. Furthermore, the survey indicates that there is a curious lack of will to reduce debt and alleviate financial stress. It may be that people have come to accept this stressed state as normal.
First, let’s figure out how much debt you can or cannot reasonably cope with. On the term “over-indebted”, the National Credit Act (NCA) offers the following definition for debt counsellors, who can initiate the debt review process only if you fit the criteria: “A consumer is over-indebted if the preponderance of available information at the time a determination is made indicates that the particular consumer is or will be unable to satisfy in a timely manner all the obligations under all the credit agreements to which the consumer is a party, having regard to that consumer’s (a) financial means, prospects and obligations; and (b) probable propensity to satisfy in a timely manner all the obligations under all the credit agreements to which the consumer is a party, as indicated by the consumer’s history of debt repayment.”
To me, this definition is vague and inadequate. Taken literally, it could mean that only if your monthly debt obligations exceed your income are you over-indebted, which is nonsensical, given that you also need to take into account your essential living expenses.
A widely used measure of indebtedness is the debt-to-income ratio, which is the percentage of your disposable income that goes towards servicing debt. What is an acceptable ratio? DebtBusters recommends that it be under 30%. It says 30-40% is in the danger zone, 40-50% is unsustainable, and above 50% is highly unsustainable. A caveat from my side is that, if you have a mortgage bond, you can subtract the percentage of your income (it shouldn’t be more than about 30%) that goes towards bond repayments, because otherwise you would be renting, which would come out of your essential expenses.
The survey found that, overall, 17% of respondents were using 40-50% of their after-tax household income to service debt, and 31% had a debt-to-income ratio of over 50%. Among respondents earning less than R20k a month, which makes them unlikely to have mortgage bonds, about 30% had a ratio of over 50%. Looking at age groups, 20% of respondents aged 24 years or younger had this over-50% level of debt. It’s probable that the bulk of their debt is vehicle finance, personal loans, and retail credit, including store cards and credit cards.
On dealing with their high debt and financial stress levels, 37% of respondents reported actively cutting back on monthly spending, compared with 44% in 2023, and 35% said they were looking for a better or higher-paying job, down from 38% in 2023. This suggests fatigue has set in, says Benay Sager, CEO and executive head of DebtBusters.
“When people are faced with money stress, generally they will attempt to do two things: increase their income or control or reduce their spending. Compared with a few years ago, it appears there is some fatigue, and consumers have lost enthusiasm for taking these actions,” he says.
This may be because they think everyone else is in a similar situation, or worse. Across all age groups and all income categories, over the four years the survey has been conducted, a higher percentage of people believe they have less debt than their peers: this rose from 18% in 2022 to 30 32% this year.
“What is this telling us? It may be that we are becoming desensitised to levels of debt. If we believe we have less debt than others and we see others buying things, it actually makes us want to buy things, and if we can’t buy things cash, we’ll buy them on credit, and this may be driving borrowing behaviour,” Sager says.
The bottom line, in my view, is that all debt not secured to an appreciating asset, which applies only to a business or a property, is bad debt and needs to be minimal, preferably zero. If you are in over your head and cannot reverse the spiral by yourself, don’t put things off or feel paralysed by the weight of it all; seek professional help. And if there is no alternative but to go into debt review, ensure your debt counsellor fully informs you about what it entails.
* Hesse is the former editor of Personal Finance.
PERSONAL FINANCE
