What will you do with that 6%?

Mbongeni Mguni | Friday May 8, 2015 12:50

“The worst thing someone can do would be to get into more debt, to get that ‘top-up’ and get more credit,” he says.

Hoko says of his client base, he has found that public servants are among the most debt-stressed, as they have greater access to credit schemes. Credit providers of all types view public servants as the crème de la crème of customers, as they are backed by unions and government.

The financial planner, however, says little financial education is provided when civil servants take up credit, leading to over-indebtedness and the dreaded “zero nett pay” situation.

“Civil servants and other debtors need to ask for advice,” he says.

“They need to understand that when you get into debt, the person giving you that debt is not the best person to ask for advice. It’s tainted advice.”

So what should civil servants aim to do with the extra coins that jingling in their pockets?

“They should look at the debt they have which has the highest interest. A lot of clients pay high interest because they don’t have fixed assets and 100 percent of their borrowings are unsecured.

“Take the extra amount and put up even a small property, so that you link your debt to an asset.

“You will then be free of the high interest loan and the machonisa.” Transforming one’s debt into assets such as property involves moving from unsecured borrowings to a mortgage, which attracts lower interest rates. However, for many heavily indebted civil servants, such an alternative appears far-fetched as they battle with every day obligations.

The effect of the increase, for many of the workers in this category, will only be to enable them to better service their credit obligations.

The furthest thing from such workers’ minds will be to use the extra income to enhance their savings. But that is exactly what Hoko says needs to happen.

“You must remind yourself that you have to save before you spend,” he says.

“Don’t try to save after you have dealt with expenditure. If you have P10,000, you want to say, ‘let me save P1,000’ and spend P9,000’.

“Take it off at the top automatically, before you spend the rest.”

Hoko and other experts say while painful for many, greater personal savings ease the need for short-term, expensive credit while providing a safety net for economic shocks such as rationalisation and salary cut-backs.