Most of us have a brush with debt at some point in our lives. While it can be a way to add genuine value (think of a home loan), debt can easily get out of hand. According to the National Credit Regulator, 58% of South Africans are having difficulty clearing their credit card debt.
The cost of most types of debt is exponentially higher than any return on investment you can achieve in the market. This means that even when you are not taking on new debt, the continuous increase in your existing debt due to interest and fees is greater than the increase in the money at your disposal to pay off that debt. You therefore go down the rabbit hole of debt, plunging further into chaos each month.
It is possible though to get out of debt. Here’s how.
1. Change your mind set about debt
To get out of debt, you firstly have to decide to do so. You have to recognise that if you own something that was purchased on credit and that credit is still outstanding, you do not really own the item. Your credit provider does.
When you look at your bank statements and you have R1 000 in your cheque account and R5 000 available in your credit card, you do not have R6 000 in the bank. You do not own the money in your credit card. It is the bank’s money and they charge you a hefty price for borrowing it.
The most important rule of getting out of debt is not to spend money you do not own.
2. Budget, budget, budget
Ah, yes, our dear old friend, the spending plan. I keep banging on about having a spending plan because it really is the first step to financial freedom.
If you do not have a clear spending plan showing what comes into your bank account and what leaves it, you will never be able to improve your financial situation. In terms of debt in particular you have to know what your instalments are so you always have enough money in your account to service your debt. The penalties for missing a debt instalment are hefty and unnecessary – avoid them at all cost.
A clear spending plan is also vital for steps 3 and 4 below. Whether you like it or not, if you do not yet have a spending plan, you should compile one as soon as possible.
3. Allocate more money to your debt repayment
If you want to pay off your debt faster, you have to pay more than the minimum instalment each month. Plotting out your spending plan will enable you to see how you can free up additional money to pay towards your debt. Are all the expenses in your spending plan necessary? Can you free up some money by changing your short-term insurance policies? You can also try to renegotiate the interest rates on your outstanding debt.
Another option is to increase your income by setting up a side hustle or allocating any other funds that come into your account to debt repayments. If you do this, choose to dedicate your additional income to paying your debt instead of absorbing it into your normal cost of living.
4. Choose your strategy for paying off debt faster
There are two main strategies for paying off debt faster: targeting the highest interest rate debt first or focusing on the smallest outstanding balances.
To target the highest interest rate debt, rank your debt from the highest interest rate to the lowest. Focus on first paying off the debt with the highest interest rate and then move your way down the list. This strategy’s effectiveness lies in the fact that expensive debt is paid off first.
The second strategy is the debt snowball method. You pay off the debt with the smallest outstanding balance first. Once that debt is paid up, you redirect the instalment you used to pay on that debt to the second smallest debt. Each time you pay up a debt, you redirect the instalment to the next debt instead of adding it to your cost of living fund.
Both strategies are effective. The one best suited to your circumstances depends on the type and value of your debt (usually it is a combination of the two).
5. Close accounts when they are settled
Do not forget this step! To prevent yourself from creating new debt and falling into a debt trap all over again, it is essential that you close your account or credit card once you have settled it. Do not leave it open even “for emergencies”. You have worked hard to get to this point, exercising enormous self-control along the way. Be considerate to yourself and do not get into the position again where you have to fight off temptation.
Get in touch if you would like assistance with paying off your debt faster.