Managing Expectations

Do you know what it’s like to really want something? You’re earning some money but the desire for a costly item is eating at you? Sometimes, it seems so easy to borrow money or go into debt to get the things we want. Managing our expectations about what we can afford with our income is one of the most difficult things to do.

Advertising – whether on social media, television or any other medium – relies on creating an intense desire for things we don’t actually need. When we make rash decisions based on this, we risk putting ourselves in debt to fulfil our desires. But being in debt because we’ve bought something we can’t afford is a terrifying place to find ourselves!

Themba and Lerato both want to purchase a car but Themba starts looking at cars that are too expensive for his current salary. Many people do this. Be careful not to let your imagination run away with you! Lerato helps Themba get back to reality when she suggests that he looks at cars that are within his budget. If you do buy a car that you can’t afford to pay back, the chances are that it’ll be repossessed anyway, this means you’ll have no car and you might even find yourself blacklisted! At this stage of Themba’s career, it is a good idea for him to buy a smaller, cheaper car. At a later stage, when his income has grown, he can sell this car and afford to step up to a more expensive one.

How do Themba and Lerato start to work out what car they can afford?

Once Themba has worked out his monthly budget (see Info Section 3), he can see how much money he has left to put towards a car instalment, once he has saved for the deposit.

He and Lerato have decided that they want to put R4,000 down as a cash deposit for the car. By putting down a cash deposit, you reduce the overall debt amount and therefore don’t pay interest on that portion of the cost of the car. The bigger the deposit you pay, the less interest you’ll pay on the remaining debt.

There are a number of Vehicle Finance Calculators available on the internet for you to use to calculate what you can afford. In the example below, the costs are as follows:

Here are other expenses when purchasing a car.

Balloon payments
Themba has chosen not to include a balloon payment in his payment scheme. A balloon payment is when you still owe a lump sum on the car at the end of the repayment period. You will have had to pay interest on it throughout the loan time but not the actual cost of it. At the end of the term you will then need to pay the lender this amount. Although it makes it cheaper to pay the car instalments, it does mean that you don’t entirely own the car at the end of your repayments!

Car insurance
When you purchase a car on hire purchase, you will automatically need to pay insurance for it. The lender can’t afford for it to get stolen or be damaged before it is paid up, so they will insist on this. It’s worth researching insurance rates as premiums change according to your age and gender. Males below the age of 25 usually pay the most because statistically they are most likely to be involved in crashes.

Although South Africa has the Road Accident Fund that offers basic third-party insurance, it is very limited. Making a claim can be difficult and only protects you from liability (legal responsibility) if someone is injured or killed. It won’t protect you from being sued for damages to the other person’s car.

South Africa has two types of car insurance that you can purchase. You can get ‘third-party, fire and theft’ (or simply third-party) insurance. This means that should you be involved in a crash, you will have insurance to pay for the damage to the other vehicle. It also means that if your car is stolen or destroyed in a fire, it is insured. However, any damage to your car caused by a crash is your own problem.

The other option is comprehensive insurance which covers damage to your car and any damage to another vehicle involved. If you buy a car on hire purchase you will need to have this type of insurance plan in order to get financing. You will also be covered for theft and fire and possibly other benefits, such as roadside assistance and a drive-home service. Although this is the most expensive option, it does provide a good safety net should you have a crash.

Service plan
Another aspect of buying a car is whether you want a service plan or not. Again, this adds a monthly cost but it can save you money if your car suddenly needs repairs. It definitely buys some peace of mind, so try and calculate this into your monthly budget. Again, the cost of the plan depends on the make and the age of the vehicle you purchase.

An alternative is a mechanical insurance plan which is available for second hand vehicles, or vehicles which have run out of their service plan. This covers mechanical breakdowns although there are limitations and restrictions. Be on the lookout when you buy a second hand car as the dealer will often automatically include this when you sign an offer to purchase.

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Another person in the family who is struggling to manage her expectations is Samke. She really wants to rent premises to set up her hairstyling business and she ignores the advice given to her by Ma Ruby. She’s excited to open a digital bank account quickly, which also has very few transaction costs, and this spurs her on towards signing a lease.

There are increasing changes in the banking sector in South Africa. Here’s a quick look at the differences between traditional and digital banks:

Traditional banks:
• Have branches where you can speak to consultants in person about your needs.
• They have ATMs that you can use to withdraw or deposit money.
• They charge money for all or some transactions. (Certain banks charge more per transaction than others.)
• They may or may not be linked to a retail store.

Digital banks:
• They have no branches.
• They operate within particular retail stores where the till acts as the bank.
• They may also have stalls within the retail store.
• They have very little infrastructure so they can keep their costs low.
• It’s very quick to open an account as you can do it online.
• Even if you have no money in your account it stays open.
• Many transactions are free.

When choosing a bank to use, it’s important to do your research and decide which bank will work well for you.

When you sign a lease for a property, you agree to pay the landlord a fixed monthly sum for using his property. Letting commercial property (which is used for a business) is similar to a residential lease except that you do not have quite as many rights to stay in the property if you don’t pay the rent. Getting an eviction order – to remove people from a commercial property – is much easier than evicting people from their home.

Once you have signed a lease for a certain period – often one year – you will need to pay a deposit and pay your monthly rent on the due date. The deposit is often once or twice the cost of the monthly rent, to protect the landlord from any damage done to their property while you are a tenant. The dangers of not paying your rent are that you can be evicted from your property and you may lose some, or all, of your deposit. If you end your lease before it expires then you will also need to pay a cancellation fee. Samke may regret impulsively signing a lease!

Managing expectations of what you can afford to do with your money is important. The consequences of being blacklisted are really difficult to live with. It means that you don’t have access to any credit or loans, and you won’t be able to open any accounts for a number of years. Once you are blacklisted, even if you pay the debt off in full, you will still have a negative credit listing for about five years.

Even if your debts don’t end in blacklisting, they will negatively affect your credit rating and your ability to purchase items you need in the future. Both Themba and Samke must manage their money carefully so that they don’t fall into any of these financial traps.