How to Cope When Debt Damages Your Mental Health

So much writing about personal finance focuses on the basics, like sticking to a budget or paying off debt. The emotional toll of money, however, is often missing from the conversation. And yet money and mental health are inextricably linked, a notion that is backed by both common sense and modern psychological science, too. Consider, for example, a recent study published in the Journal of Consumer Research, which looked at how financial well-being affects a person’s overall well-being. In general, it found that the worse you feel about your finances, the worse you feel overall.

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7 Steps to Financial Wellness

It’s a fact that many indebted South Africans struggle to pay off the interest on their debt, let alone the debt itself. 

Far too many consumers fail to consider the impact that their living for today lifestyle has on their future financial wellbeing, says Sylvia Walker, market development manager at Old Mutual. 

“They are living from payday to payday and have no spare money to save,” says Walker. “They are either living beyond their means or spending on luxury items that are not necessities.”

She recommends seven steps to financial freedom. 

1. Draw up a budget

1. Make a start by drawing up a monthly budget. Knowing where your money is going to each month is a critical step. 

“Ultimately, you need to reach a stage where you are in full control of your finances. Drawing up a budget is a simple process, and basically gives you an instant indication of what you are spending your money on, helping you to identify where you can cut costs,” says Walker.

2. Pay off the priciest debt

Start with your most expensive debt. In other words, reduce the debt that costs you the most interest, such as store cards. 

3. Look at the long-term picture  

Now consider your long-term goals. Remember that saving money for retirement is your most important long-term savings. 

It’s a fact that by starting to save early you have a longer period in which to invest, which means that you can take advantage of compound interest. Called the eighth wonder of the world, compound interest means that you earn interest on the interest already earned.

4. Save for emergencies   

For the medium term, save something each month towards an emergency fund. This will avoid you having to go into debt if unexpected situations strike. Ideally, emergency savings should be kept in a separate account to discourage you from dipping into it. 

Instead of saving your money in a savings account at the bank, why not explore the option of investing in a unit trust account? 

Walker says: “Advantages of doing so include potentially higher investment returns, while still giving you immediate access to the funds. It is important that the returns on your savings exceed inflation, to ensure that the buying power of your rands is not eroded.”  

However, if your investment goal has a shorter term, it is important not to expose the investment to too much volatility. Equity exposure, for instance, is likely to be too volatile to be suitable for short-term investment goals.

5. Tackle your short-term goals

Now you’re ready to plan for short-term goals. Maybe you have a yen to travel in the next few months, or perhaps you’d like to buy a new car? 

6. Protect yourself

You need to safeguard yourself against loss of income due to death, disability and critical illness. Income protection is a critical part of being financially empowered. 

7. Draw up a will

The final step in a financial plan is to draw up a valid will. Your will is a record of how you want your assets to be distributed among your loved ones, and how your liabilities should be paid for. 

A valid will is an essential element of estate planning and includes everything you own and owe – from property and cars to investments and debts.