South Africans have been facing unending challenges. And, aside from experiencing increased emotional, physical, and mental strain in recent years, their financial woes do not appear to be going away anytime soon. Therefore, you, the consumer, should exercise caution when participating in any upcoming online or in-store ‘shopping bonanzas’ simply because you ‘can’ or want to.
Stand firm and don’t get tricked by various marketing gimmicks luring you in with a: “Get early access…”, “Be the first to receive our special discounts…”, “Prepare for massive deals coming soon…” or “This week, every day is Black Friday…” message.
If your debts are already excessive in comparison to your monthly income, you will only be digging yourself deeper into a bottomless debt hole when taking part in Black Friday or relating events. It is shocking what we have seen in the industry – most consumers spend 60+% of their income to service monthly debt obligations. I would, therefore, advise you and fellow South Africans to calculate your debt-to-income ratio before considering spending money you have not budgeted for or do not have.
When it comes to keeping those money situations ‘under control,’ proper debt management is now crucial.
What exactly is a debt-to-income ratio?
Your debt-to-income ratio, also known as DTI, is an essential step to managing your debt. It compares your monthly income amount (gross – before deductions) with how much you owe (the total amount of your monthly debt obligations, such as rent, a home loan, credit cards, car payments, a store account, or other debt).
How do you calculate your debt-to-income ratio?
The calculation in a nutshell:
- (+) Add up all your monthly debts.
- (÷) Divide your total debt amount by your income amount before any deductions (gross salary amount)
- (=) The final percentage (%) determines your debt-to-income ratio.
Continually do the calculation to make wise choices when spending your hard-earned money or when wanting to use credit, aka the bank’s money.
What the % category means & your plan of action going forward:
A low debt-to-income ratio demonstrates a favourable balance between your debt and income. In contrast, a high percentage highlights a riskier situation due to debt exceeding your gross income amount.
Which of the following category does your debt-to-income ratio fall into?
- 0-20% Good debt-to-income ratio category
Your debt compared with your income amount is considered to be good.
Plan of action: Maintain your financial situation.
- 0-40% Moderate debt-to-income ratio category
Your debt amount compared with your income reflects a moderate financial position.
Plan of action: Consider making minor adjustments to lower your overall debt amount.
- 41-60% Risk debt-to-income ratio category
This calculation result portrays that you are moving into risky territory.
Plan of action: Consider making significant adjustments to lower your overall debt amount.
And, taking part in any upcoming ‘sale’ events or unplanned-for shopping sprees is not recommended.
- 60+% Over-indebted debt-to-income ratio category
Reaching a 60+ percentage is concerning and signals over-indebtedness.
Plan of action: Your best course of action is to find an authorised professional or company to help fix your debt safely. Taking part in any Black Friday, Cyber Monday, Tech Tuesday, or Black November ‘sale-of-the-year’ buys is a definite no-no.
Managing your debt is not only unavoidable but also critical. By determining your debt-to-income balance or ratio before taking on any additional credit during imminent, enticing events, you take an important step towards informed decision-making and financial mastery.
Carla Oberholzer is spokesperson and debt a advisor at DebtSafe