Many more South Africans are applying for debt counselling, which may be a bad thing or a good thing, depending on how you look at it. Picture: Independent Media.
A presentation by debt counselling firm DebtBusters this week highlighted a worrying trend.
Many more South Africans are applying for debt counselling, which may be a bad thing or a good thing, depending on how you look at it.
The reason may simply be that more South Africans are becoming over-indebted and have creditors hammering on the door (a probable scenario in the current economic environment), or it may be that South Africans are getting better at recognising they have a debt problem and proactively seeking help. Maybe a bit of both?
But that’s not the thing that particularly worried me. It was that the proportion of older people applying for debt counselling was increasing. On top of that, their average level of debt was increasing.
The DebtBusters Debt Index for the fourth quarter of 2023 shows that:
• Of South Africans entering debt counselling, the average debt to annual net income ratio of people aged between 45 and 54 years was 124%. For people aged 55 years and over it was 122%. Compare this with an average ratio of 69% for people in their late twenties and 89% for people in their early thirties.
• Just under a third (31%) of applicants were 45 or older. This was up from 20% in 2016, the first year of the DebtBusters survey. On the other hand, the 25-to-34 cohort has shrunk, from 44% to 32%, indicating that younger people may be becoming more debt averse.
What does your ‘debt curve’ look like?
Ideally, as you get older, your assets should increase and your debts and other liabilities decrease, so that, by the time you reach retirement age, you have a basketful of assets, possibly including a paid-off property, zero debt and you’re free of other demands on your finances, such as children.
Let’s consider the “debt curve” of an average working person. When you start your first job, you have zero assets and, unless you have a student loan, zero debt. Part of your income will go towards everyday living expenses and part towards savings, but you will probably also acquire expensive items, such as a car and household appliances, using credit. Your debt will grow, but so should your savings, even if you are contributing only to your company retirement fund.
The big jump in debt comes if you buy a property. Your debt to annual net income ratio could easily reach 250%: this would occur with a net income of R600 000 and a bond of R1.5 million. (At current rates you’d be paying around R16 000 a month.) But there will be a corresponding jump in your assets, because a property is an investment that should appreciate over time.
It’s at this point in your life, perhaps in your early to mid-thirties, that your “debt curve” should theoretically be at its peak. If you’re earning well and have good prospects, it might peak a little later, perhaps in your early forties, if you move to a bigger house.
But as you continue to pay off your bond, which is typically one’s biggest liability, your overall debt will start coming down.
Considering the term of a bond, which is 20 to 25 years, by your late fifties or early sixties your bond should be paid up. Ideally, by then you should be able to rely on your assets, accumulated over your working years and including your property, to sustain you in retirement.
Financial advisers and investment experts are always bemoaning the fact that most people do not save enough for retirement. There’s one thing worse: it’s not saving enough and going into retirement with significant debt on your shoulders.
* Hesse is the former content editor of Personal Finance.
PERSONAL FINANCE
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