Find a debt-busting strategy that works for you
Three methods to blitz your debt
The problem with debt is that it takes money away from your future self and transfers this future wealth to your credit providers.
There are more people in South Africa who owe money than there are people who earn it. According to the National Credit Regulator, 25 million South Africans have credit accounts (this include store accounts, credit cards, home loans, etc). Meanwhile, only 16.3 million South Africans have jobs, Stats SA says.
And our social welfare system currently supports 17 million social grant recipients.
The average household is made up of fewer than two breadwinners, so a husband can be unemployed and have a store account in his name, while his wife is the income earner (who herself has a few credit accounts).
The problem with debt is that it takes money away from your future self and transfers this future wealth to your credit providers. It robs you of the opportunity to start saving and investing.
So, what can you do to reduce your debt and are there any tips that will ensure you pay it off in the most optimal and efficient way possible?
Without question, the best advice for reducing debt is to not take on new, unnecessary debt.
To eliminate your existing debts across your various accounts, there are broadly three recommended approaches.
Regardless of which one you deem as most appropriate for you, the first step is to list all your debts and compare them across the following factors: outstanding balance, minimum monthly instalment, interest rate charged and age (when last you paid each debt).
Before even going into the different approaches, the following rules are important;
- Rule 1: Do not get into more unnecessary debt.
- Rule 2: Keep all your accounts up to date by paying the minimum instalment on each one.
- Rule 3: Draw up an accelerated debt repayment plan and stick to it until you pay off all accounts.
Your debt reduction plan should include using any excess cash to pay off your debts according to one of the following methods:
Method 1: list the debts by interest rate charged (from highest interest rate to lowest) and pay them off in that order. The benefit of this approach is that it is the quickest way to wipe out your total debt balance because it directly reduces the overall interest that you pay on your overall debt. This allows you to get to the debt-free finish line much quicker than the other options.
Method 2: list the debts by outstanding balance (from smallest to largest) and pay them off in that order. The benefit of this approach is that it is generally the quickest way to eliminate the number of accounts you have. This is called the “snowball effect”, and it has the psychological advantage of quickly showing progress.
Method 3: list the debts by outstanding balance (from largest to smallest) and pay them off in that order. The benefit of this approach is that you begin with eat the “elephant” one bite at a time and work your way through until you eliminate your smaller debts.
To summarise: Make the decision to crush your debt and don’t add any new debt. Choose a debt-busting approach that will work best for you, financially and psychologically, and stick to it until all your debt is eliminated.
Compound interest is a phenomenal concept, make sure it works for you instead of against you.
* Siwundla holds the Financial Manager Risk qualification and is the investor relations and product analyst at CoreShares.