General Archives - Louis D. van Niekerk

In the current pressing economic times, it seems appropriate to voice an opinion on how to become debt free. I’ve been debt free for some time now and would love to help other people achieve this too.

Obviously this can happen faster and slower, but in essence the principles remain the same.

Most people create debt trap in such a subtle way that they don’t even notice. By the time they are in the debt trap’s claws, they cannot always tell you how they got there.

The problem starts partly with our socialization and partly due to lack of education. So let’s create a scenario which most people are familiar with:

You start working and soon you cannot get to and from work without a vehicle, since we don’t have adequate public transport – plus you’ve always wanted a car and now you can afford it. You have to live and even though you might just rent a small place, rent takes a big bite at the wallet. Also, since you are now standing on your own two feet, nuisance expenses starts to kick in (which Dad always paid for?): Insurance, medical aid, clothing, cell phone, food, etc. Before you can say budget, it is gone.

The problem is not the budget or the size thereof, but rather how people go about spending it. In most cases people will buy a car and find a place to stay that would, when all other expenses are added, bring them to a position where they spend virtually all their monthly income. For most people this equates to affordability i.e. they earn a decent salary and all these expenses fall within the budget and they can still afford a pizza.

Wrong! Most vehicles are financed over the longest period, which these days are 48-60 months, but can go up to 72 months. Here’s what a R 100 000 vehicle will cost over different time period at say an interest rate of 15%. The same vehicle can cost up to R 152 000 (72 months), which is 1.5 times the original price.

The problem is the Joneses. Most people buy a too expensive a car because they can afford it. Compare the same value vehicle and time period, but this time we look at the monthly installment.

It is clear very quickly that the 72 or 60 months option is much more “affordable”. Yet, you have to take this argument a little further or perhaps, reverse it a bit. Let’s say you have R 3 000 per month to pay for a car’s installment. Let’s look at the value of vehicle you can afford, depending the period, again at 15% interest.

Surprise, surprise. The longer the period the more expensive a car one can afford with R 3000 a month. Still there is a catch. Vehicle are depreciating assets and not appreciating assets like houses. Vehicles are unlike a house where even thought you might be stretching yourself a bit to afford it, the value of the property keeps increasing so that when you sell it you get more than what you paid. On the contrary, in most cases for periods around 60 months, if you try and sell the vehicle in the first three years, the car is worth less than what you owe.

So, say you bought R 127 000 car with your R 3000 per month (Scenario A). After three years, you have spent R 108 000. Now you want to sell the car only to find out that if you sell it, you will not get anything more than what you still owe (if you are lucky). So now you have nothing (like when you started, only it cost you R 108 000). If you bought a R 87 000 car (Scenario B), which is maybe the second hand version of what you could buy with R 127 000, you can now sell the car for say R 65 000. So while the you still lost, a fair amount, you still have some value. But here’s the trick.

If you can hang on to that car for two more years, while still spending the R 3 000 a month, but this time on an investment the picture looks much different. Let’s say you can now invest the R 3000 in your own house’s bond, which is also around 15% interest. Let’s compare the scenario’s.

With Scenario A the car is paid off and now probably worth around R 70 000 (in today’s terms), so for the R 180 000 you paid, you now have R 70 000 in your pocket. With Scenario B, your paid off car is probably worth R 50 000, but you also have R 84 000 base on your investment, which comes to R 134 000! Now you are R 64 000 ahead of yourself, based on two different decision in the space of three years. Repeat the process for another three years and you are starting to pull away from the self that are keeping up with the Jones.

There is another aspect to this. While houses appreciate, most of the time your salary will catch up with the payment (inflation, you get a better job etc., while the payment monthly remains the same). If you therefore can use the R 3000 in those two years that your car is paid for to supplement your bond payment (as suggested above) this will allow you to buy a larger property or even a second one. If you can stick it out for 6 years with your original car, you would have gained almost R 200 000 (in today’s terms) plus your property that you bought after three years (when you paid of the car) would have grown as well. This will leave you with at least R 350 000 more than what you had.

Guess what? You will buy your next car cash and let’s be clear. A car cost you money in the same way that a ice cream cost you money. You buy it for the pleasure thereof, but don’t ever fool yourself to think it is an investment – even if you get a car allowance and tax break (email me – I’ve done the numbers). So buy a car cash and accept that it is costing you money. If like me you want the occasional new car, also fine because it is cheaper than financing the damn thing. If you are going to make the best financial decision, buy the cheapest and most reliable car you can find, but in my mind life is not just about the best financial decision (as if buying an ice cream is a good financial decision!!)

Ok, while the above was a brief overview on how to let your Rands go further, there are some other fundamental mistakes people make. First of all credit cards. Credit cards can be your best friend and your worst enemy. Why the former? It is the cheapest and most convenient way of payment worldwide (contrary to popular belief). When is it the latter? When you are unable to pay off your credit card at the end of the month. When you have an outstanding balance on your card, the interest is incredibly high and depending on your institution can be 6-8% higher than prime. So when you buy a pair of jeans for R 500 on credit and pay it off over 6 months as many people do, the jeans cost you closer to R 700! At the same time you don’t qualify for cash discounts, which may have knocked down a further 5 % in some cases.

But the cardinal sin is buying consumables on credit. When I buy krisps or soft drink, I often get asked at cashiers “straight or budget” after some engagement with them I discovered that many people use their budget facility to buy groceries. So what is the implication then. Well, budget facilities don’t allow you to pay off the outstanding amount in one go, but force you to commit to a monthly payment (sounds a bit like a car doesn’t it?). This means your R 1000 grocery bill paid off over 6 months (or heaven forbid a year) will cost you a cool R 1064 after 6 month (and R 1146 after 12 months). That is 6% more than shelf price. When last did you receive a 6% increase income?

I understand that people get forced into buying groceries on credit because they can NOW afford to R 200 installment, but not the R 1000 groceries. So maybe, we have to look at some ways of getting out of the debt trap. Before I do that I just want to illustrate what we all know. When you have debt on your car, house and credit card and the interest rate rises, it has a triple effect on your budget and when your budget was already not enough, this will push you over the edge.

First off all learn to bite the bullet for a while. Few will notice if you scale down a bit and those that make a scene are not worth having in your life. Sell the car that is killing, even if you take a short term knock, you’ll make it up soon by not paying so much interest on other stuff. Buy a car and finance it over three years if you have to finance it.

With the money that you save monthly on the car installment, kill the credit card debt (with this I include all the Edgars, Woolworths, Fochini or whichever other card you own). Do the ceremony. Yes, take the scissors, experience the utter terror of cutting these cards up and know that the terror you feel is not a terror of not making it. The terror is a fear of not being able to live the lifestyle you want. You will, I guarantee it, but not in the short term. This terror is great as it is the last resistance to setting you free. Remember braveness is doing that which you are afraid of not doing something that everybody else think is scary.

You are actually free now. You are just burdened with a few of your historical decisions, but in essence you are on the right path toward being debt free.

Ultimately you will own your car and house and experience the joy of only buying something when you can pay cash for it. It’s a wonderful place of calm and peace and you are now on your way there.

If you are looking to accelerate your debt-free state on your house, here’s what you do. I simple statistic. If you can pay 10% more every month on your bond that what your bank requires, you will pay of a 20 year bond in 9 years. Imagine how much you can save in those nine years – you can even pay off your beach house and house in 18 years!! Also, every time you get a pay increase, increase your payment on your house accordingly. In other words, while your payment don’t go up with inflation, your salary does (or should). So don’t fall behind, if you get a 10% salary increase, increase your payment on your house by 10%.

Another trick is to not allow your bank to lower your premium when the interest rate falls (yes you heard right). If you are used to pay, say R 3300, in high interest rate periods and you can continue to do so when the interest rate falls, you will pay even more than 10% extra every month and your bond will be paid off even faster.

I suppose there are many other little things you can do, but implementing the ones I mentioned will get you into the right frame of mind, because being debt free is a state of mind. It’s a way of living and an attitude toward fiscal matters. Once you’ve experienced it, you will not go back to your old way – that I promise.

Disclaimer: The information in this article is aimed at illustrating the benefit of being debt free and does not in any way aim at giving financial advise nor does it suggest that anybody who reads this should feel compelled to use some of the illustrated examples. For practical purposes everything written in this article is pertinent to the author and the author only. Any person following these examples do so at his or her own risk.

Ed: I wrote the below piece in 2008 and it did indeed explain the load shedding from that time. And then. came the wrecking-ball called Zuma…

If you haven’t read my first blog, not to worry. It merely lead to me deciding to elaborate on a short bit of our history in order to explain how we landed in the power pickle that we are in…well sort of.

Let’s just look at the country since 1994. Popular belief amongst most South African is that the country was economically under pressure from years of economic sanctions, but had a reasonably strong treasury despite. In fact most white South Africans will tell you to this day that we were economically stronger that we are today, which just are not.

Our country had by then been involved in (too) many years of warfare against what was termed “Die Swart Gevaar” and later “Die Rooi Gevaar” being the blacks and communists respectively – not that these were seen as different entities rather that the latter were backing the former.

In reality while FW and Madiba were negotiating a new government of national unity, the country were in its worst economic state ever. Our annual budget deficit were hovering around 10%, inflation and interest rates were at an all time high and rising (>15% in both cases). The only thing that seemed respectable was the Rand vs. Dollar and that kept most white South Africans happy. At the same time, white utilities, schools, road and medical infrastructure were in line with first world standards – again as a white South African this was a great country from a standards point of view.

The new government embarked on their respective election campaigns of jobs for all, houses for all, no more poverty, etc. with a whole different picture in mind. They were not in touch with the level of the national treasury or the general bad state of the economy. While Trevor and Tito may have understood the realities a bit better, the general new government did not. Joe Slovo certainly did not when he promised 1 million new houses in one year to the masses shortly after arriving in office.

Not only was the situation dire, the global market who we long did not care about and they not about us (because of sanctions) had changed in the years we were isolated. In particular the emphasis shifted from the exchange rate as major economic health indicator to inflation. While our exchange rate were reasonable, our inflation was starting to get out of control.

Trevor Manual (with help from Tito no doubt) soon realized that the inflation had to be under control for the global investment community to take South Africa seriously as an emerging economy.

So the new government, post 1994, were no faced with two tough realities, which were opposing in nature:
• Matching their election promises with delivery thereof
• Getting the economy onto a growth path and out of trouble

It should be clear that matching election promises would cost money and lost of it, but the economy was about to collapse so that money did not exist. Let’s say it’s like a father promising each of his kids a new bike, clothing and a playstation and then discovering his business is on the brink of being bankrupt.

So what call did they make? Well a harsh one on the surface, but the best one under the circumstances. They placed their emphasis on long term economic health, which could only be achieved if the global investment community views you as a healthy emerging economy and not a battling African economy. We were closer to the latter in 1994 than most people appreciate.

So in order to bring down inflation and interest rates, the government stopped spending on infrastructure. It’s crude, but again was the right thing to do. In my mind the thinking went like this: We’d rather have some run down hospitals, schools and roads, but have the global investment pouring in than keeping infrastructure in tact, but soon collapsing into a typical African state. The view they took was long term. Once investment came to the country, this would spark economic growth, which in turn would generate more taxes and a healthier economy from which they can then spend money on the infrastructure again.

Again crude, but effective. The plan worked and it worked well. We did get our inflation and interest rates under control, the investors did arrive and that did send us into a un-matched 9 years (and counting) growth phase which was previously unheard off. The price? Well the decade in which very little was spend on infrastructure would cause major run-downs (which they anticipated), but this would take more than double what they saved and twice as long to recover, which is the phase that we are currently in.

Before you start screaming that the current situation is worst again i.e. high interest and inflation rate, still pot-holes etc. I’ll get to that in another blog.

So with money little, a population screaming and an economy battling to get of the ground, the government placed a moratorium on further electricity expansion by Eskom around 2000 when Majuba the last coal fired station was being completed. The thinking was that power generation must be more privatized and increasingly shift toward pebble-bed (nuclear) generators rather than coal based which most of our grid is. It’s just that from a priority point of view this was not executed as well as it should have been.

While our money was being spend to get the economy into a better state, the execution of the privatization was very poor and at least 5 if not more years were lost in the typical planning cycle in Eskom. Consider that Eskom needs to plan at least 20 years ahead as building a power station takes at least ten years. Loosing 5 plus years is not easily recoverable.

In the mean time the economy is growing stronger than ever, the middle-class is developing nicely as a result, we’ve attracted foreign investors and ALL of this places more pressure on the power demand. With planning now 5 years behind and demand reaching the upper barriers of what was anticipated it is not difficult to see that we were (and still are) heading for trouble.

It does off course not help that in order to save and to become more BEE compliant, Eskom outsourced its coal-transport requirements to BEE companies. Too many of these companies had never owned a truck before and so when tendering for contracts did so at rates that were not economically viable. Their (BEE boys) plan were always that they will outsource this to some existing contractor and just take the arbitrage and get wealthy. Only because the tender value was not viable, not contractor would touch the contract (off course I am exaturating a bit). Not to long and coal delivery to Eskoms power plants in Mpumalanga were not receiving the amount of coal that they used to, which lead to the shortage recently exposed by Carte Blanche and conveniently called “wet” coal by Eskom officials as stated reasons for not generating.

So our government is guilty, there is no doubt, but give them credit. It was partly because of the mess they inherited in 1994 and partly due to new previously disadvantaged people in important positions, not having sufficient experience to do the right things. The big mistake was the skills vacuum that was left after implementing BEE and Affirmative Action to aggressively post 1994.

For me the upside is that South Africans are resilliant and in the weeks following January it was clear that we would moan and groan but that we were not going to led load shedding get us down. I loved seeing people shopping in half-dark shops, eating in restaurants that can only serve cold drinks, etc.

As indicated earlier, I’ll try and show what caused the current situation and why this is not as bad as it may appear.

Until next time.

Category: General

Becoming debt free

So what caused the load shedding?