6 practical steps to clearing debt and living a debt-free life
Before the global financial downturn, living on credit was the norm globally. But there has been a worldwide wake-up call and individuals are increasingly realising that living in debt hampers wealth creation and the improvement of living standards. The good news is that with the right guidance and strategy, paying off debt and living debt-free is very achievable. Here are six simple steps to achieve short-term debt relief.
Step 1: Draw up a realistic monthly budget
Compile a list of your monthly income and expenses. Your income should cover expenses comfortably. If not, see where you can cut back. Renegotiate interest rates on properties, ask for more competitive vehicle and home insurance quotes and cut down on unnecessary spending. Try distinguishing between your ‘wants’ and your ‘needs’ – but don’t cut out all of your ‘wants’, if your budget is too tight and boring, you are more likely to stray after a month or two. Work some contingency money into your budget and define a realistic amount to save. If you have spare cash at the end of the month, use it to clear your debt quicker.
Step 2: Pay expensive debt first
The higher the interest rate on your debt the more expensive it is, so when paying off debt, pay the most costly ones first. Credit card and store card debts are likely to be the most expensive. These and personal loans can cost you up to 20 percent in interest. It helps to pay more than the minimum amount owed each month because the interest you owe will automatically decrease.
But do not stop paying your other credit providers – you do not want to jeopardise your house or risk losing your car. You could also be blacklisted, which will make it very difficult to obtain credit in future.
Step 3: Become a financial wiseguy
Spend smart. It is possible to find good quality and low prices if you shop around and find out where to find the best deals. Shop around for the best clothes prices, cellphone package and medical aid deal. Try to refrain from going on a spending spree at the beginning of each month only to dip into your overdraft by the 15th of the month. Try breaking bad spending habits. And refer to your budget to see what is not essential in your monthly financial mix.
Step 4: Live within your means
If you can’t afford to pay cash, you probably can’t afford it. If you have to put that Louis Vuitton bag or flat screen HD TV on your credit card, it’s out of your price range. Opt for another brand. And when buying a car, don’t over-extend yourself. Choose a second-hand model and finance it over the shortest period possible.
Step 5: Use cash instead of credit
A debit card linked to a savings account, can only be used if there is a positive balance in your account so getting into debt is impossible. This, or drawing cash, is a foolproof way of staying out of trouble. If you do need to use your credit card, try to pay it off at the end of each month rather than just paying the minimum amount owed. That way no interest will be charged.
Step 6: If all else fails, negotiate to pay off debt slower
If you genuinely can’t pay off your debt, for instance, if you have been retrenched, don’t panic. Contact your credit providers to work out realistic payment plans. This will keep help protect your credit record and save you some stress.
While these tips will be invaluable in the short term, a bright financial future needs planning and a partnership with a good financial advisor. They will take a look at your life strategy and help you figure out your financial strategy over the short, medium and long term.
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