In today's Q&A session, Warren Ingram tackles the pressing issue of debt management, the importance of an emergency fund, the benefits and limitations of money market and 32-day notice accounts, and how a blended approach to saving can offer both security and growth.
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
In today's Q&A session, Warren Ingram tackles the pressing issue of debt management, the importance of an emergency fund, the benefits and limitations of money market and 32-day notice accounts, and how a blended approach to saving can offer both security and growth.
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
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Speaker 2:Hi Warren. So just a question and a follow up on the podcast of Mastering your Debt. So now you're in a tight spot. God make your payment struggling to keep up. I know you advise speak to your bank firstly, and so on. So now the new thing that keeps popping up on social media is like debt busters and debt savers and all of that Something wise to consider. Also, can you share more on debt review, debt counseling? Is it advisable to go with it? When, when, like, is there a point where you can decide? So now I have no way further, but I go forward, but need to go with this. Debt busters or counselors or review? Just a little more on that, please. Thanks a lot for the other things. The other shows, and especially this episode on Mastering Debt, really helped a lot. But we can just maybe elaborate on those kind of things like debt counseling and debt review.
Speaker 3:Thank you for your question on debt and especially around debt consolidation or debt review and the differences and what are the options for someone who's struggling with debt. I think it's a big issue now that a lot of South Africans are grappling with interest rates rising and the cost of living in a shooting through the roof. A lot of South Africans are finding themselves struggling to keep their head above water. Just to understand, there are quite a few options available to someone with debt. Some of them have some options are very useful and very helpful, and others are a little bit scary. It's always important to just go in with your eyes wide open. My first comment is that when you've got a debt problem and you're now in a position where you can't pay your debts off on a monthly basis, I'm going to remind you that the first thing you do is you contact the people that you owe the money to. If it's the bank, get hold of the bank and tell them that you've got an issue with your debt. It's not always an answer that they'll be able to help you, but it's the first thing that you should do To avoid engaging with the banks when you owe the money and hoping that you'll find a way. What happens is it starts to affect your behavior and they'll start to judge your lack of contact and your lack of payments in a way that will affect you going into the future. You become considered a bad payer, and that's not good for you. I think step one is contact them, and one of the options that they'll look at is they might restructure the loan. For example, if you owe debt and it's due over a 12 month period, they might say to you okay, we can help you by restructuring the loan that you've got. What we're going to do is we're going to set it up so that you pay off that loan over a five year period. It's going to probably cost you more in interest over the time, but the big difference now is that your monthly repayments will be a bit less, or maybe a lot less, and gives you a bit of breathing room to try and get that debt paid down.
Speaker 3:If that is the option that you go for, I think it's really critical to understand that you can't take on any other debt in a situation like that. If they restructure you alone, you can't now go and borrow money from another bank or another credit provider and think that everything is going to be okay. All of this stuff is going on to your credit history. It's available to all credit providers and when they're going out of their way to restructure a loan and you take on more debt, if you get into any more trouble after that, the likelihood that any credit provider will now want to work with you is going to be zero. They're going to say to themselves we gave this person a restructuring plan and what they did was they used that breathing room that we gave them not to pay off the debt but to actually go and take on even more debt. And this is not a person we can trust and therefore we're not going to help them anymore. Then your options start to narrow down very quickly, I think.
Speaker 3:Step one speak to the banks. I'm not saying all the banks are all of our friends and they're always going to help you all the time, but ignoring them and not engaging them is much more dangerous than engaging with them. They might offer you a debt restructure, which I think is a very good option if you are going to be disciplined, if you are going to stick to then repaying and, of course, then don't go and pay off the minimum If your debt repayments now are 1,000 a month and you can afford 1,200. That's what you do. You make other sacrifices now and other trade-offs to the point where you get that debt out of your life as fast as possible. You just don't want to be living under any debt cloud where the banks are now in a way doing your favor, because banks are businesses and they're going to earn interest from you while they're so called doing your favor. But it's better than ignoring them, because then you go into a totally different process. So step one try a debt restructure.
Speaker 3:Step two might be a debt consolidation. Now, a debt consolidation is where you've got, for example, a personal loan, an overdraft and some other kind of debt problem and the bank says to you what we prepare to do is lump all of those debts together into one big amount and allow you to pay that off over a slightly longer period of time. For people that are normally very financially disciplined and just get themselves into a financial problem because of a particular set of circumstances, debt consolidation might be an answer, because it allows them then to kind of get a breath of breathing room and get that debt repaid over time, but certainly as fast as possible. My problem with debt consolidation is people that are bad with debt, people that love to spend all the time, because all that debt consolidation then does is give them even more scope to spend even more money. And so I think you've got to be really honest with yourself to say well, I know myself, I know why I got into the debt, it's not normal, it's not part of my past behavior, it won't be part of my future, and I'll take this consolidation and get out of this debt hole that I'm in. But if you know that you're a serial spender, that you're someone that keeps getting yourself into credit card trouble month after month, year after year, debt consolidation is not going to help you and it's just going to make the problem bigger and worse over time.
Speaker 3:Your third option is then a legal process called a debt review, and I think you need to understand that there are a lot of consequences to debt review. First, I mentioned that it's a legal process. That means that you're going to have to now work with a debt counselor and there are a special kind of collection of people all on their own, because there are some very good, very ethical debt counselors and there are a whole bunch of shocks and a whole bunch of dodges that are pretending to be helpful but in fact are just out there to make fees. Or for you Just understanding that, a debt review where you engage the services of a debt counselor. You're going to be paying a debt counselor. They don't do it for free, I can promise you that. But you're now in a legal process and what happens is, in terms of the national credit regulator, you're going to have to complete forms, and the scary form that you have to be really aware of is a form called form 16, where you're actually signing away your rights and you go into a debt review process. What then happens is that that debt counselor takes on the job of talking to the companies that have issued the debts to you. They now tell those companies that you are in debt review and what happens is you go into a five-year payment plan where they kind of freeze the interest that you were paying so they might get to the point where you're not charged interest at all, and then you go into a plan where you are now obliged to pay off those debts over a five-year period.
Speaker 3:What's important to understand is there are lots of consequences to debt review. Number one you may not take on any other debt. You are not legally allowed to take on other debt. You're not legally allowed to get out of a debt review process. So once you start the debt review process, the way out of a debt review is you pay off all the debts that you had on the day you started. So you can't get out of a debt review if you've still got credit card and personal loan debt that you started. That started the whole debt review. The only debt that you can keep while going out of debt review will be a home loan, a mortgage, because that term is longer, but any other debts. If you start debt review, all of those debts have to be paid off within that five-year period. There is no other way to get out of debt review. And so just be very careful when you look at a debt review process.
Speaker 3:If you're talking to a debt counselor and they give you this thing called the Form 16, and you sign it, you're now signing away your rights to manage your credit. You've now given that to a debt counselor. They take on that responsibility and they will basically allow you some pocket money every month to live and the balance of the money will be going to pay off your debt. So you basically become kind of like a kid again, where someone's acting like your parent and telling you how you can spend your money and what money needs to go to pay off your creditors, and there's no way out of that until you've paid off that debt within the five-year period. So I'm not saying that it's terrible for everybody. There are people that get themselves into terrible debt and are in such a deep hole that there is no other way, and they do meet a good debt counselor and they do go through the process and come out the other end with a new sense of kind of financial discipline that sets them in good stead for the rest of their lives. Those are the exceptions. The bulk of people will get into this. They will hate the process, they will hate the debt counselor. The debt counselor will be making money from them over time and they'll find themselves stuck in this process until the end of that five-year period and as soon as the five-year period is over they find themselves building up debt again because they haven't actually developed a new way of managing money.
Speaker 3:So I think debt review and dealing with a debt counselor can be helpful for some people, but it's not your first choice. Your first choice is speak to the bank, try and get a payment plan where you restructure your credit. Second choice is do a debt consolidation where you put everything together. Third choice and, I think, almost final choice is a debt review, and that might be your last chance to lose. So then that's something that you have to do. But I think it's really worth doing some reading before you go down that road. Make sure that you're going into these things eyes wide open and before you do anything, don't listen to what the debt counselor is telling you.
Speaker 3:Read the forms that you've been given.
Speaker 3:Read the literature. Don't just sign stuff where the debt counselor says to you I'll just sign here, everything will be fine. Read what you've been given and if there is something that's a form 16 and the follow up to the form 16 is a form 17. If you're getting those forms and you sign those, just know that you've not changed your legal rights around your debt and who's going to help you and manage your debt for you. So it is a big step and something that you've got to do very carefully. I hope that helps, and one of the resources that I always recommend is a website called Maya on Money. I'll say that again Maya on Money. She writes a lot about debt and does some really good work on debt. She's been a guest on Honest Money before and certainly knows a lot more about the side of debt than me and definitely a good resource to go and read up and do some searching on her website about debt if you're stuck in that hole right now. I wish you all the best and thank you for your questions.
Speaker 4:Hello, this is Julinta. I just have a very short question. I have a 32 days color count account with African Bank and they offer a nominal interest rate of 8.65% and annual of the same 9%. My question is when I read up, it looks like this money is basically for emergencies. So it looks like. When I read up, money market account looks like it's a better option for emergency money, but in terms of the interest rate I thought it's supposed to be better than something like a 32 days account. Can you please advise what are the real benefits of money market account? I saw one for say tricks only one and when I looked at that one, when I looked at the percentage, I think it was less than the African Bank one. So maybe if you can just explain to me the real benefits of a money market account and is it really better than these color counts that are around 8% to 9% nominal interest?
Speaker 3:Thank you, Hi Junita, thank you so much for your question. I think just to understand the difference between a 32 day notice account and a money market account is important, and then to determine which one is best for you is kind of the second part of the answer. So when we look at a money market account, the real benefit of a money market account is it's supposed to give you very quick access to your money and it's trying to give you a higher interest rate than you could earn on a current account or savings account at your bank. So the job there is how quickly can I get my money and will I get a decent rate of interest while the money is being saved there? So instant access is more important than the best rate of interest that you can get. That's the purpose of a money market account and they will try with money market accounts to offer you a very high rate of interest. But the price that you pay for the higher interest is and then access to money is that you won't necessarily get the same rate of interest when you're prepared to lock away your money for a period of time. And so if we look at something like a 32 day notice, the upside of a 32 day notice is that it might actually give you a better rate of interest than your money market account. But now you realize that it comes at the cost of having to wait for 32 days before you get access to your money. So I think, just to understand, that each have a different role, and the one is good when you need access to money quickly, and that will be a money market account. And the other is good when you're looking for a rate of interest that's a little bit better, but you're not too worried about accessing the money instantaneously, and that would be the 32-day notice.
Speaker 3:So now, when we talk about your emergency fund, I think it's important to understand the role of an emergency fund. It's there to provide you money at a time when you are very short of money and you might need it at very short notice, and so I think their understanding that money market account would help you a hell of a lot if you've got no access to credit. For example, if you've got a credit card and you don't owe any money on the credit card and you have an emergency, you can at least draw on the credit card now, put notice on a 32-day notice account and then get access to that money, pay off your credit card and kind of reset yourself to kind of build up your emergency fund again. So if you have access to credit and you don't use that credit for anything other than your emergency fund, then I think having a 32-day notice makes sense. But if you don't have access to credit and your emergency fund is there to help you when things really go wrong, then I'm not sure I want to lock away all my money into a 32-day notice account and then be desperately short of money in an emergency.
Speaker 3:Most of the time, 32-day notice accounts will allow you access to the money within that period of 32 days, so you could get it after five days or something.
Speaker 3:But you're going to pay some kind of a penalty, either a penalty as a fee or lost interest, and I'm not sure I really like that idea either.
Speaker 3:So, janita, I think there's nothing wrong with doing a blend so you could have some money in a money market account, which maybe is earning a bit of a lower rate of interest, but it's there to help you at very short notice, and then you can have more money locked away in a 32-day notice account to cover you for the balance of your emergencies. So maybe you said to yourself well, if I need three months in an emergency fund, which I think is a good idea, then maybe you put two months in a fixed deposit or a 32-day notice and you put one month in a money market account and hopefully between the two you'll be fine in most instances and getting the best rate of interest that you can over time. So thanks, janita, for the question. I think it's one that a lot of people are grappling with and not all of us always understand the differences between these money market accounts, savings accounts and fixed deposits and notice accounts. So I appreciate the call and please feel free to send us more.