No debt is good debt. Ideally. However, few of us are born with a silver spoon in our mouths. Few of us have an unlimited trust fund that can be dipped into at will. Some debt is better than others though…
Buying your groceries on your credit card and then putting it on budget (so you pay it off over time) is probably the worst example of bad debt! In fact, if you find yourself in a position where you need to make debt to pay for daily expenses, you are in trouble and it would be advisable to speak to a professional financial advisor post haste.
However, good debt leads to increases in earnings or growing value in assets. Education is a good debt, because it increases your employability and then, within your chosen occupation, it increases your ability to earn money and, over time, helps you STAY employable!
Another form of good debt is buying a property. We will discuss this, as soon as we’ve convinced you to study – buying property is expensive after all, so best you are equipped to earn well!
Educating the nation
Unemployment is real. It is true that the youth aged 15–24 years suffer the most – 55,2% in the 1st quarter of 2019 were unemployed. All though many graduates in this age group faced unemployment at a rate of 31.0% during the same period, the graduate unemployment rate is still considerably lower than the rate among those with other educational levels. Education is still the key to improving one’s prospects in the South African labour market.
Statistics South Africa and Analytico stated in January, 2017, that a person who has earned their matric can expect almost double the salary than someone who has an incomplete high school career. Tertiary education makes the biggest difference, with those with a tertiary certificate seeing a 67% jump in potential earnings, whilst a bachelor’s degree would earn the graduate a 330% jump.
Unfortunately, Analytico points out that there is still an imbalance and inequality that exists among South African earners. The huge difference in the standard of education being offered to the wealthiest 20% versus the least wealthy 20% is seen as one of the key reasons for this. Inferior basic education with limited educational resources leads to ever mounting difficulties as the person tries to improve their education, leading to greater failure rates.
In the current economic climate it is important that education is seen from the perspective of what kind of career path the person will be able to follow once the qualification is obtained. Passion and practicality need to meet up and shake hands. It can be hard to hear, especially when one is young, but one can always pursue one’s interests through lifelong learning, once bills can be paid and future financial security is established.
See what kind of earnings you can expect for different positions, based on educational levels and more: Salary Data & Career Research Center (South Africa)
But it isn’t just the young that needs to carefully consider education. More and more jobs that were considered ‘safe’ bets a few years ago are becoming redundant as computers become smarter and technologies are developed. Lifelong learning really is the key to remaining on top of developments in one’s field and thereby securing your future employability. This is also key when you are looking at diversifying your income streams. Furthering your education can lead you to a second active income stream. Do watch this space for more blogs in future on diversifying one’s income, or better still, contact us so that we can discuss your particular needs, opportunities and skills.
Housing the nation
According to Property24, the current average price of properties in Cape Town is R 7 358 214. There are currently 9853 properties on the market in Cape Town. Property values obviously vary widely in terms of location – you can buy a house in Bonteheuwel for R 480 000, one in Marina Da Gama for R 3 490 000 or Camp’s Bay for R 27 594 250.
Buying a house is not a small investment in most people’s books. In these uncertain times, where job insecurity – whether perceived or actual – is at the forefront of many people’s minds, more people are afraid of the long-term ramifications of repaying a huge bond. However, if you were to rent for 15 years, you would be paying your landlord more than what the property is worth and still not be able to call it your own.
More than a home
Of course a house will in all likelihood continue to increase in value as you simply go about your life living in it, potentially doing renovations and building on. However, property is also a very good way of securing a passive income. You may build a granny flat on your property and rent this out. You could rent your whole property out or start an Air BNB. You may also consider investing in commercial property.
When it doesn’t only rain but pours
The difference between home ownership and renting is that the owner does not have a landlord to call when a roof sheet blows off in the South Easter and rain pours in! This is one of the reasons that it is vital that you receive good financial advice from a reputable broker, to ensure that you are not overburdened with debt and that you put financial emergency procedures in place for these eventualities.
Together with your Financial Advisor you can consider your debt-to-income (DTI) ratio. This is calculated by dividing your total monthly debt by your total gross monthly income. This is one measure lenders can use to measure your ability to manage the monthly payments needed to repay the money you plan to borrow.
Let us say you currently pay R 10 000 in rent, R 1 400 for medical aid and R 2 000 for a car payment, plus R500 for other debt, thus equaling R13 900. You earn R30 000. This means you are 46% indebted. Evidence from studies of mortgage loans suggest that borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments.
As a rule of thumb:
- 35% or less is considered good – you most likely have some money left over for saving and your bills are paid.
- 36% to 49% tells you there is opportunity to improve – this is especially important if you want to avoid a crisis when unexpected expenses arise. You may have a harder time convincing an institution that you will be able to repay your debt to them.
- 50% or more means you really need to take action – With more than half your income going toward debt payments, you may not have much money left to save, spend, or handle unforeseen expenses.
The future is yours
Our circumstances, skills, outlooks, needs and priorities are unique. Whereas there certainly are social and economic trends that influences all of us to varying degrees, it is good to know that a good Financial Advisor will listen to you and help you to make wise decisions, tailored to your needs. Arm yourself with knowledge, garner good advice from a reputable source, such as your Financial Advisor, and take ownership of your future today.