How to manage your debt better and pay it off faster
Getting into debt is easy – it’s getting out of debt that’s the hard part!
Paying back a loan takes dedication, planning and financial sacrifice, but it’s worth it because living a debt-free life opens up the opportunity to start building your wealth.
Whether you have a big debt like a home loan or small debt like a store card, it’s critical that you keep up with the repayments to ensure that the amount owed doesn’t get out of control.
Getting your debt sorted is even more important during the current crisis. The coronavirus pandemic has seriously damaged the economy and caused financial challenges for nearly every South African. A recent study by TransUnion, an international consumer credit reporting agency, indicated that household income for 79% of South African consumers had been negatively impacted by the pandemic.
But the report also showed that we’re a resilient bunch: 75% of respondents said that they were able to make alternative plans to pay their bills.
But for how much longer will we be stuck in this position? Nobody knows.
Instead of waiting for the situation to get better, rather take control of your financial situation and manage your debt proactively. Many lenders have offered debt relief assistance to customers affected by Covid-19-related financial pressure. Contact your bank, for example, to see how you can best service your debit repayments given your current financial situation.
Many lenders are offering debt relief but you need to contact them. Here are three other ways to manage your debt better during the pandemic.
Know how much you owe
Calculating your total debt can be overwhelming, but this is something you have to face head-on if you are serious about managing your repayments. Use your bank’s online portal to download all your statements, then open up Microsoft Excel (you know, the green icon) and list all your debt in a table – home loan, car repayments, any credit card debt – showing the creditor’s name, initial loan amount, balance, interest rate, full payment due date, and monthly repayment amount.
This table will give you your complete debt picture and you can use it as a debt monitoring tool as you pay off the amounts.
Pay on time
This is crucial. Paying a creditor late will result in “late payment fees”, which is just more money for jam for your creditor. If your payment is late more than once, it can negatively affect your credit rating and the interest rate charged on that particular debt.
Use your debt-monitoring table to group your repayments by date, then use the calendar app on your mobile phone to set recurring reminders to ensure you don’t forget to make the payments.
The other option is to set up debit orders for all your debt repayments. This is easier and less admin-intensive, and it means you’ll never miss a payment, but you have to make sure you have sufficient funds in your bank account as a bounce of the debit order will trigger more money spent on nothing.
Choose a payment strategy
Obviously, you should pay all the minimum amounts on all your debts – on time – for the reasons above, but if you have some extra money at the end of the month, there are two ways to get rid of your debt faster.
The first is the “snowball method”. Use your debt-monitoring table to list all your debt in order of amounts owed, from the lowest amount to the highest. With the snowball method, you pay off your debts starting with the smallest debt first.
If you are motivated by small wins, this is the method for you. You’ll get a kick out of clearing each small debt from your table as you pay it off, and it will motivate you to tackle the bigger amounts, gathering momentum like a snowball rolling down a hill.
The “avalanche method” also requires some debt table tweaking. List your debts in order of interest rate from highest to lowest. The interest rate tells you how “expensive” your debt is – how much more you’re paying to your creditor on top of the loan amount. Interest is usually charged as a percentage of the outstanding balance.
So, by reducing the balance linked to the highest interest rate, you will reduce the total amount of interest you have to pay and more of your hard-earned money will go towards paying off the capital.
The avalanche method is the most cost-effective and efficient way of clearing your debt, but understanding a concept like interest rate can be difficult. But don’t worry, you’ve got this!
Set up a meeting with a qualified financial planner that will be able to guide you through all the options and help you set up a structured and realistic debt-repayment plan.
- Mokonoto (CFP®) is founder and CEO of YellowBlock.