“In South Africa, three quarters of disposable household income is spent on paying debt,” explains Marcelle Arnold (Marketing Executive at African Rainbow Life) “Overspending kills wealth creation for all, as your income is wasted on interest and debt repayments.”
The good news is that more and more people are realising that living in debt gets in the way of creating wealth and improving living standards. With the right guidance and strategy, clearing debt and living debt-free is very achievable,” Marcelle adds African Rainbow Life has put together these six simple steps to help you achieve short-term debt relief.
Step 1: Differentiate between ‘Needs’ and ‘Wants’
Start by critically looking at each of your monthly expenses separately and ask yourself the following questions: Is it an essential expense, a nice to have or a real luxury? Once you have done that, prioritise your spending. The most important thing about budgeting is to be realistic – you can only stick to a budget if it is realistic and remember that your ability to budget will only be as good as your discipline to stick to this budget!
Having a financial safety net for unforeseen expenses that may pop up is always a great idea. To create this safety net you need to get into the habit of saving – even if you can only set aside a R100 a month- it’s a start.
Put together a list of your monthly income and expenses. Your income should cover your expenses comfortably. If not, see where you can cut back. Ask for more competitive vehicle and home insurance quotes, speak to your bank about an account with lower bank charges, look for ways to lower your cellphone bill, cancel your gym contract and start exercising at home or join the local running club it is usually free. Cut down on unnecessary spending.
Separate your ‘wants’ and your ‘needs’ – but don’t cut out all of your ‘wants’, if your budget is too tight and boring, you are more likely to stray after a month or two. Work some extra money into your budget for this and decide on a realistic amount to save. If you have spare cash at the end of the month, use it to clear your debt quicker
Step 2: Pay expensive debt first
The higher the interest rate on your debt, the more expensive it is, so when paying off debt, pay the most costly ones first. Credit card and store card debts are likely to be the most expensive. These and personal loans can cost you more than 25 percent in interest. It helps to pay more than the minimum amount owed each month because the interest you owe will automatically decrease. But do not stop paying your other credit providers – you do not want to risk losing your house or car. You could also be blacklisted, which will make it very difficult to get credit in the future.
Step 3: Become a financial Smartspenda
Spend smart. It is possible to find good quality and low prices if you shop around and find out where to find the best deals. Shop around for the best clothes prices, cellphone package and medical aid deal. Try to stay away from going on a spending spree at the beginning of each month, only to dip into your overdraft or credit card by the 15th of the month. Try breaking bad spending habits. And remember to look to your budget to see what is not essential in your monthly financial mix.
Step 4: Live within your means
If you can’t afford to pay cash, you probably can’t afford it. If you have to put that big name brand bag or flat screen HD TV on your credit card, it’s out of your price range. Look at other brands and when buying a car, don’t over-extend yourself just for the “badge brag effect”. Choose an affordable second-hand model and finance it over the shortest period possible.
Step 5: Use cash instead of credit
A debit card linked to a savings account, can only be used if there is a positive balance in your account so getting into debt is impossible. This, or drawing cash, is a foolproof way of staying out of trouble. If you do need to use your credit card, try to pay it off at the end of each month rather than just paying the minimum amount owed. That way no interest will be charged. The bank gives you 55 days interest free if you pay the full amount within the 55 day period.
Step 6: If all else fails, negotiate to pay off debt slower
If you genuinely can’t pay off your debt, for instance, if you have been retrenched, don’t panic. Contact your credit providers to work out realistic payment plans. This will help protect your credit record and save you some stress. No bank wants your house or your car, make a payment arrangement and stick to it.
“While these tips will help in the short term, a bright financial future needs planning and a partnership with a good financial advisor,” explains Marcelle “They will take a look at your life strategy and help you figure out your financial strategy over the short, medium and long term.” Aim to leave a legacy for those who will come after you – don’t leave your family with debt.