Getting into debt is easy. Getting out of debt is hard! But it’s worth it. Living debt-free is the greatest financial gift you can give yourself. You need a plan and the motivation to stick to it. Our 10-step plan helps you take control of your debt, starting right now. First, six steps that you can do this month to get you going on the path to debt recovery. Then, four more steps for you to take every month thereafter.
Do these 6 things in the first month
1. Get your head right
Like any other hard thing in life, the first step is committing to the process for the right reasons. These are two good reasons:
- When you owe money, you’re not just paying back capital. You’re being charged interest every month you are in debt – and with the hike in interest rates, interest is now costing you more than it did before.
- When you are in debt, you are robbing yourself of the money you could be using each month or saving for your future.
These points should convince you that getting out of debt is the right thing to do, but the final thing you have to convince yourself of is that you can’t go back. You are in this process for the long haul, so be prepared to make sacrifices for many months to achieve your ultimate and extremely rewarding goal of being debt free.
2. Tally your debts
Make a note of every debt you have, including your credit card, bank loans, retail accounts, car finance and home loan – even the R200 you owe your cousin! Now what you need is information. Check your statements or call the lending institution to get an answer to the following for each loan or line of credit (write down the answers):
How much is outstanding?
- What is the interest rate that I am paying?
- How long until the debt is paid back at this rate?
- Can I pay in more than the minimum monthly repayment and are there any penalties for doing so?
3. Decide on your method
There are two tried-and-tested methods that deliver the best results for paying back your debts. They are:
4. Do a budget
Write down all your monthly expenses, including rent, medical aid, insurance, school fees, food, transport, entertainment, clothes and so on. Then look for every opportunity you have to tighten your belt. Could you buy yourself lunch at the office less often? Could you share a ride into work with someone and halve your petrol costs? How much could you cut back on entertainment? Could you buy cheaper food at the supermarket?
If you find that you are already stretched to the limit of your budget, consider ways to earn extra income – like renting out a room in your home, or selling baked goods to colleagues at work.
Take or make any opportunity you can to save money or earn a little extra.
5. Keep track of it all
Put all of this information into a spreadsheet or a wall chart, or just in a notebook. Keep track of each lender, amount owing and each monthly instalment. Every time you make a payment, update each of these blocks.
6. Make the first round of payments under your debt-busting plan
At month-end, put your plan into action. Pay back the minimum instalment on all your accounts. Then, put any additional money into the debt with the smallest outstanding balance or the highest interest rate – depending on whether you have opted for the snowball or avalanche method. Congratulations, you have taken the first step towards financial freedom! Now keep on going, every month.
Next, do these four things in the months after
7. Kill your lines of credit
As soon as those loan balances start looking healthier, you will be tempted to spend on credit again. Don’t. Remember all your hard work paying these debts back. And as you finish paying each debt, close the account. Be very disciplined about this. If you are still thinking “but…” then you are not fully committed to the process and you will end up right back where you started.
8. Consider overpaying on your asset finance as well
Your home loan and car finance would probably come out last on the additional repayment list, whether you were using the snowball method or the avalanche method. These debts are slightly different to the others, because they are funding assets and generally have low interest rates. This is not to say that you shouldn’t try to reduce or get rid of them – you absolutely should – but that you don’t need to prioritise early settlement to quite the same extent as you have with all your other lines of credit.
That said, it’s astonishing how quickly you can reduce the term of your homeloan and the interest you pay if you can pay just a little extra into your bond each month.
9. Consider starting to save
The interest you earn on saving is almost always less than the interest you are charged on credit. This means that if you are saving while still paying back credit, you are losing money. The most financially sound approach to take is to use all your extra money to get out of debt first and only then start saving. However, in practice, this doesn’t always make sense.
For one thing, people tend to need the security blanket of having savings, even if they are paying back debt. For another, you might find that you need to spend money while you are paying back debt, and if you don’t have savings, you’ll have to go into even more debt and start the cycle over again. So go ahead and save if you have the budget to do so, but don’t forget that getting rid of debt is your priority.
10. Stay debt free, for good
Paying back outstanding debt is a gruelling process. But it feels great once it’s done. Whatever you do, don’t start the cycle over again. If you need something, it's better to save for it than to go into credit. Try to adopt a policy of going without, rather than spending money you don't have.
Enjoy living debt free
Congratulations on committing to getting out of debt and to living that way in future. You’re in this for the long haul, but it will be worth it in the end.
NOTE: If you have taken on more debt than you can afford to pay back using these methods, then you may have to consider debt counselling.
Apply today for debt management and counselling services from Truth About Money, including telephonic debt counselling, debt consolidations and debt settlement. Learn more here.