Debt, be gone! A surefire way to take charge of what you owe
There's no ball like a snowball to get your debt under control.
By Maya Fisher-French
Budget, budget, budget. Yes, it's something we all know we should do, just as we all know that we need to floss every day.
Even so, budgeting and money management is something people only usually do when they absolutely have to. In other words, when they are not making ends meet and are getting deeper and deeper into debt.
Budgeting is the first step to paying off debt. If you try to tackle your debts before taking care of the budgeting process, you will not get very far.
But if you spend a little time analysing your spending, I guarantee you there will be somewhere you can save money.
Maybe it's cutting back on take-aways. Maybe it's reducing your data usage. Maybe it's finding smart ways to bank. There are always areas of wastage that create a saving opportunity, even if it’s just R500 per month.
When what you owe on your credit cards, store cards, and personal loans resembles the GDP of a small country, you may feel that R500 is a drop in the ocean. How will it possibly have any impact on your debt levels?
The temptation is to bury your head in the sand and use that R500 for retail therapy instead. The good news is that R500 can be a lot more powerful than you realise.
While editing the South African version of Total Money Makeover by US money expert Dave Ramsey, I came across the “debt-snowball method”, a powerful tool for becoming debt free.
The concept is simple. Rather than trying to accelerate all your debt repayments, select your smallest debt and pay it off as quickly as possible.
Firstly, it’s a great psychological boost to have a debt settled.
Secondly, it frees up the money you were spending in repayments on that debt, and allows you to target your next debt.
In my book Maya on Money: Implement your Money Plan, I used Dave Ramsey’s snowball method to show how just R500 extra each month could settle R30 000 of debt within two years.
In this scenario you have the following debts:
Clothing account R2 000, minimum repayment R200 per month
Retail store account R3 000, minimum repayment R300 per month
Bank credit card R10 000, minimum repayment R300 per month
Branded credit card R15 000, minimum repayment R500 per month
Month 1 to 3
You pay an additional R500 into your clothing account, increasing the payment to R700 per month. Within three months, the account is paid off. You close the account immediately!
Month 4 to 6
Use the R700 you were paying into the clothing account to increase your payments to your retail store account, increasing those payments to R1 000 per month. The retail store account is settled within three months.
Again, you need to close the account to avoid the temptation to use it, otherwise you derail the debt repayment plan.
Month 7 to 14
With the store accounts closed, it's time to tackle your credit card debt. Take the R1 000 you were paying into the retail store account, and use it to boost your credit card payments to R1 300 a month.
Within nine months, your credit card will be paid off. Either close the account, or reduce your credit limit to just R500.
Credit cards can be useful payment methods, but only if you transfer money in at the beginning of the month.
Month 15 to 23
The R1 300 you used to pay off your bank credit card is now used to add to the repayments on the branded credit card. This brings the repayment amount to R1 800. Within just nine months, this card is paid off.
You are now debt free, after finding just R500 extra each month in your budget. Of course, this assumes that you stick to your budget and do not take on any other credit during this period.
Not only will be you debt free, but you'll have R1 800 of disposable income to start investing.
Hopefully this exercise will provide some motivation to get started with that budget. And while you're about it, don't forget to floss daily!
Maya Fisher-French is an award-winning financial journalist with a flair for cutting complex money matters to their core. “Maya on Money, Your Money Questions Answered”, is published by NB Publishers.