If you have debt, join the club — and then make a plan to get rid of it so you can move onto bigger and better financial goals.
Debt is a four letter word that nearly all of us have to deal with! In 2019, the figure for the household debt of South African’s indicate that, on average, each adult was paying 72,8% of gross income towards debt repayments.
If you are one of the lucky ones with a 0 debt balance, give yourself a huge pat on the back. But for the rest of us, debt can feel like a burden that keeps you from being able to accomplish other goals, like building a bigger emergency fund or saving for a home.
The good news: We have a game plan to help you get started paying down your debt, one step at a time.
1. Take Stock of All Your Debt
To tackle your debt, you need to know what you owe, right? So first things first: Look at all the pieces of your debt puzzle in one place. That means knowing the details on all your loans and lines of credit. This includes gathering paperwork for stuff like your credit cards, student loans, car loans, outstanding medical bills, personal loans, payday loans — basically any outstanding debt you have.
Next, write down the following information for each one:
- The name of your lender or creditor, and the type of debt it is (student loan, credit card, etc.)
- The outstanding balance
- The interest rate you pay
- How much the minimum amount due is
Next, grab your calculator. Add up all your required monthly minimum payments. That total represents the bare minimum you must pay every month to avoid late fees. While you have your calculator handy, add the outstanding balances you have. That number signifies your total debt.
As disturbing as this total debt number may be, at least you now know exactly where you stand, and that’s a good thing. It allows you to explore your options knowledgeably and make informed decisions about your debt.
2. See If There Are Ways to Lower Your Rate.
You may know that your risk profile is normally used by institutions to determine your debt interest rate. Armed with this information, nothing stops you from approaching your credit card service provider to negotiate a lower interest rate on your debt.
Alternatively, see whether you are able to transfer your debt balance to a credit card service provider offering a lower interest rate, but make sure that this lower rate will remain in place over the period you intend to pay this balance off. Take any fees associated with such a transfer into account.
You should also investigate options to consolidate your debt into one account, selected for its lower interest rate. You save on monthly account fees spread across the numerous debt accounts that you may have.
If you are able to get a lower interest on any of your debt, update the information you gathered in the first step.
3. Take Stock of All Your Debt.
Before you decide how much you can put toward your debt, it’s important to look at other parts of your financial life so you can properly assess how well you’ve got the basics covered. You don’t want to get in a cycle where you’re throwing so much money at your debt that you find yourself coming up short at the end of the month, or not able to work toward any other goals. So ask yourself these questions:
- Do you have an emergency fund in place? If not, consider building up one month’s worth of living expenses in a savings account before you start paying more than the minimum on any of your debts. Why? Because emergency savings can help cover those big-ticket surprise bills that can wreck a budget and send you into more debt. One month is the minimum to strive for, although eventually you’ll want about six months’ worth of expenses saved.
- Are you saving anything for retirement? If not, consider saving any amount you can into a personal retirement account like an RA (Retirement Annuity). Contact your financial advisor to select the best option for your retirement savings.
If you feel confident that you have these bases covered, take a good look at your budget and see how much extra you think you can put toward debt. If you’d like this number to be bigger, take a look at where your money goes. Are there places where you can trim costs and free up Rands that can go toward debt? Or do you have a second job you can devote a few more hours to so you can put more cash toward your debt? Every little bit can help.
4. Decide on a Pay-Down Method.
How you ultimately decide to pay down your debt is up to you, but the two most popular methods are the debt avalanche and the debt snowball.
Both methods apply one primary rule to comply with each month: Always pay the minimum amount due on each debt account each month!
The debt avalanche method is the less expensive way to pay off your debt. Here’s how it works:
Next, write down the following information for each one:
- Sort your list of debts by interest rate from highest to lowest.
- Whatever extra money you have for debt payments, put it toward the debt with the highest interest rate first (this will typically be high-interest consumer debt, like credit card balances).
- Once you’re done paying off the highest interest rate debt, keep moving down the line. Use the money you were putting toward the finished debt toward the next one on your list, and so on.
The debt snowball method is when you put your extra money toward paying off the smallest debts first before moving onto the next smallest, and so on. Although this will cost you more in interest in the long run, some people may find this method more motivating because it can help you achieve quicker wins that encourage you to keep plugging away.
Curious to see how each payment method would work on your debt? Consider trying an online debt payment calculator that lets you toggle between the avalanche and snowball methods so you can see how long it might take to pay off your debt in whole.
5. Don’t Forget to Treat Yourself.
Getting rid of debt takes discipline and courage, so all debt slayers should take some time to celebrate their victories. Plan rewards whenever you reach a major milestone, but not at the cost of increasing your debt balance again. Get rid of a credit card bill? Celebrate with a happy hour among friends. Finally sent in the last payment on your student loans? Host an “I Got Out of Debt” dinner party. Treating yourself doesn’t have to be pricey, but it can go a long way toward keeping you motivated.