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It's My Money with Marise Reinach · Strictly Business

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  You're listening to Strictly Business Podcast with Lindsay Williams.
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  This edition of It's My Money is brought to you by Brenthurst Wealth, your partner
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  for global wealth creation.
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  Welcome to It's My Money.
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  It's My Money is brought to you by Brenthurst Wealth, South Africa's
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  multi-award winning boutique wealth manager.
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  This week we're going to talk about debt because there's an article that was penned
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  by Maurice Reinhart and it says the
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  following.
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  Use this moment to cut debt and invest smarter.
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  That's the headline.
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  Maryse, why did you choose the debt theme this week, by the way?
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  Did something suddenly happen that made you think debt is what people should know
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  about?
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  I know after the past few years,
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  people have been a bit squeezed by higher prices and higher interest rates and such.
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  And many people did go into the debt route to help them keep afloat.
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  with interest rates.
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  coming down and stabilizing,
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  it is giving a bit of breathing room to maybe get a relief from that debt spending
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  and
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  rather move that funds to a more profitable space.
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  Do you know what?
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  I think debt is something that is treated differently by different people in
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  different countries.
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  Now, for example, when I moved to the Netherlands, the first thing I did, of
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  course, go to the supermarket, get some provisions,
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  and then I proudly went up to the cashier.
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  And gave him or her my credit card.
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  And the person says, no, we don't take credit cards.
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  And I thought, but you're the biggest supermarket chain in the Netherlands.
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  We don't take credit cards.
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  And then I delved into it a bit more deeply, Maryse.
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  And debt is like a dirty word here.
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  But in South Africa, of course,
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  the society and the economy couldn't function without debt at all levels.
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  Yes, I've heard that about the Netherlands before.
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  Which is very interesting.
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  But in South Africa, I think with the unemployment rate being so high and people
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  just struggling from day to day,
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  it is an easier way to just get a bit of breathing space.
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  And sometimes, most of the time, actually, the people that can least afford it
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  actually take these high interest debt,
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  which they can't manage.
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  And then they go into debt counseling and all such.
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  I think it's just very easily accessible in South Africa, which I don't always
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  agree with.
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  But some people just don't have any other option.
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  Yes, too late now.
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  Maybe future generations can be educated similar to the way the Dutch do it.
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  I'm not saying it's the right way,
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  but certainly is one way to reduce a society's reliance on indebtedness.
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  But anyway.
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  Let's have a look at it now.
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  You say here's where it gets practical.
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  Inflation cools, rates soften.
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  Suddenly your repayments are a few hundred rand lighter, where your grocery bill
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  doesn't spike as much as it used to.
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  So what you're saying is, in a sort of softening interest rate environment, which
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  is what we have at the moment,
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  thanks to the South African Reserve Bank and the way they keep themselves nice and
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  squeaky clean.
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  So there may be, as you say, a little bit more money there.
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  So what do you do?
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  Do you go out and blow it and say, fantastic, do you invest it, or do you
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  reduce your debt?
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  I think you're going to paint a pretty powerful argument for reducing your debt.
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  Yes.
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  So with these,
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  because I do mention it doesn't need to be a massive change in your monthly cash
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  flow,
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  that you have a bit more breathing space in.
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  It can be a few hundred rands that you can save.
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  And if you don't focus on using it towards a more very specific goal,
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  it can disappear very quickly into your daily spending.
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  And you don't even realize that you have actually lost this opportunity to rather
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  redirect those few
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  extra hundred rands that you now have available to maybe a very high interest
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  rate debt that you have,
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  or maybe just increasing your savings a bit.
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  So it should...
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  firstly, should try and focus on settling high interest rate debt.
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  I mean, some of the debt interest rates that you get out there is as high as 20% a
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  year,
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  and you can't risk-free get that in an investment.
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  So that should be your first focus point to get that paid off as quickly as
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  possible.
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  Can you give some examples without mentioning names of companies?
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  The first thing that springs to mind is something that I've already mentioned in
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  our conversation, and that is a credit card.
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  It's a high debt, isn't it?
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  Yes, any personal loans, usually clothing accounts, accounts like such,
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  they have very high interest rates.
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  And also when you go into the micro-lending, I mean those interest
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  rates...
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  or through the roof.
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  So those types of high interest debt should be focused on reducing it as
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  quickly as possible
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  when you get the chance.
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  Also, I suppose if you've bought your car using debt or your home is obviously
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  something
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  that everybody, unless you're very rich, has a bond on.
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  I think there's a formula that if you pay off your bond a little bit more than you
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  need to every single month.
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  It reduces the...
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  the amount of time that the bond is prescribed for.
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  Isn't that the case?
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  Yes, that is something that you can look at.
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  With the bond cost, it's a bit different because you're building an asset over
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  time.
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  And usually those interest rates are more competitive.
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  It's lower.
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  So then you need to look at, okay, what is the interest rate on my bond?
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  What's it costing me?
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  And what is possible as an investment return in the markets if I'm comfortable
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  with taking a bit of risk?
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  And if you can comfortably get a return of, let's say, 11%, 12%, but your bond is
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  only 19%,
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  then it makes sense to rather invest the extra funds you have available to earn
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  that
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  higher return rather than paying down your bond.
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  I like this.
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  Does that make sense?
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  Yes, it does make great sense.
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  I mean, the fact is that, as you say, you should make a priority list and say,
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  right.
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  And it's easy to find out what you're paying.
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  This loan cost me this much, this one, this much, etc.
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  And the highest ones come first.
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  It's very simple.
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  I like these points that you make here, certainty versus potential.
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  And you put it very simply.
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  You say paying off high interest debt is a guaranteed return without risk.
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  So when you go into an investment, for example, you think, well, I'm going to get
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  this return and it's a growth stock, etc.
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  But you've got the risk to the downside.
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  Paying off your debt, absolutely no risk whatsoever.
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  You've paid off the debt and that is.
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  That's it.
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  No downside.
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  So it's again, debt versus investment.
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  What about flexibility?
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  Lower debt frees up cash flow.
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  Why is cash flow important in a portfolio or to a household, Maurice?
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  Well,
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  it's important for times of uncertainty and to make sure that if we have another
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  like COVID event, for example, that you do have something safe for the next economic.
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  pressures that arrive.
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  And so flexibility is also important when you need to consider which debt to pay off
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  out first and if you're rather going to
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  invest because paying off debt, it gives you a bit more cash flow on a monthly
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  basis.
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  So it can probably ease a bit of living costs.
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  And if you're rather going to go into investments, you just need to know, okay,
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  am I able to invest this for the long term?
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  Is it short term?
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  Do I think I'm going to use it again in the next six to 12 months.
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  So that is important to consider when you're looking at investments is make sure
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  that your time horizon
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  corresponds with the risk you're taking in the investment so that your flexibility in
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  that sense regarding your risk
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  is also suitable.
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  You have a paragraph which is entitled small changes lasting impact and it sort
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  of reminds me of the
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  lessons that I keep on getting drummed into me or have had drummed into me over
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  the years.
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  and I try and drum into my kids,
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  is if you put a few hundred rand aside and you put it into a savings account even,
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  a money market account, whatever it is, if you're that boring, then you'd be
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  surprised that after 10 years,
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  exactly how much you've accumulated.
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  And the same, I suppose, is with debt.
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  A small change is lasting impact.
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  You reduce that debt, and it makes things so much easier in other aspects of your
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  life, which you've just explained.
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  So how do you go about it?
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  You say take the next step.
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  What is the next step?
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  Do you need to sit down and say, right,
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  interest rates have just been cut by the South African Reserve Bank by 50 basis
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  points, whatever it is.
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  You get your credit card statement.
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  You compare it to the previous months.
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  You realize how much you're saving and then do something about it.
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  Is that the way to do it, be methodical?
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  Yes, you should focus on where you can increase your long-term position And to...
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  be in a better position in the next 12 months or 18 months.
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  So whether you focus on reducing debt or increasing your investments,
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  you can decide what is the right balance for you to put yourself into a better
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  position
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  for the next 12, 18 months and even further.
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  And it doesn't need to be a massive change.
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  It can only be a few hundred rands and you'll be surprised at what big a
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  difference it can make if you keep doing it for
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  the long term.
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  Exactly.
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  And at this time of year, running into Christmas, it's very tempting to say, OK,
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  I've got that little bit extra I can spend, so let's spend it.
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  Tempting, yes.
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  Is it the right thing?
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  Probably not.
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  Just one thing I want to qualify.
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  This conversation has been not anti-debt, but certainly telling us how to reduce
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  debt and how to deal with debt.
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  Debt is a useful part of any economy, isn't it, Marisi?
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  Without debt, you wouldn't be able to buy a house, for example.
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  Yes, it does have its space, but you need to focus on where it's adding value or
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  creating wealth.
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  So a house is different because you're actually building an asset within your
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  portfolio.
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  Where using personal loans or a credit card for luxurious items,
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  obviously that is not going to increase your wealth.
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  So you need to focus on disciplined spending and debt in the right way can be
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  useful.
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  Like, for example, if you could.
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  take a student loan because you want to further your studies and improve your
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  position going forward with job opportunities,
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  that's something completely different.
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  So what the focus should be is on financial education, on bad debt is what
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  we call it,
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  and what you should stay away from and reduce as quickly as possible if you have
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  fallen into that trap.
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  Great advice.
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  Thanks very much for your time, Maurice.
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  Maurice Reinach is head of Brenthurst Wealth Pretoria, and that was It's My
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  Money.
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  It's My Money was brought to you by Brenthurst Wealth.
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  an award-winning boutique wealth management company.