How to take charge of your debt

2020 left many of us reeling financially. According to survey data collected by McKinsey & Company between September 18 and 29 last year, “Consumers in South Africa continue to see reduction in income, spending, and savings. Discretionary spending remains subdued, as South Africans aggressively adopt habits to save money.” And the Mail and Guardian reports that, “Households’ debt compared with their disposable income has increased from 73.6% in the first quarter of 2020 to 85.3% in the second quarter, according to South African Reserve Bank’s Quarterly Bulletin.”

If you’re feeling weighed down by debt, here are a few guidelines to help you get back on your feet.

1. Calculate your debt

It may sound like an obvious first step, but given the stress that substantial debt can cause, it’s often tempting to ignore the problem rather than face up to it. When tallying your debt, remember to include credit and store card debt, any loans you have e.g. a student loan or vehicle finance as well as any other lines of credit you may be using.

2. Create a budget

A budget gives you a clear overview of your finances – what’s coming in and going out – and enables you to calculate your debt-to-income ratio which can be helpful in understanding your debt situation. To reach this percentage, add up your debts and other monthly financial obligations, and divide this figure by your gross monthly income. The Balance identifies four debt-to-income-ratios:

36% or less is the healthiest debt load for the majority of people.
37% to 42% isn't a bad ratio to have, but it could be better.
43% to 49% is a ratio that indicates likely financial trouble.
50% or more is an extremely dangerous ratio.

3. Decide on a payment plan

There are two recognised strategies for paying back debt. The Debt Snowball Method advises paying the minimum amount due on each of your debts and then using any extra money available to pay off your smallest debt first, followed by your second smallest debt and so on. The win: you’re able to see results quickly, which is a great incentive to keep going.

The Debt Avalanche Method, on the other hand, advises paying the minimum amount due on each of your debts and then using any extra money you have to pay off your debt with the highest interest rate first. The win: the amount of money you’ll save on interest.

Whichever method you choose, make sure that you make your payments on time every month and that you pay at least the minimum amount due.

4. Watch your spending

One of the reasons many people land up in debt is poor spending habits. If that’s you, it’s time to reign in your spend. And one of the easiest ways to do that is by adding a line item to your budget for monthly indulgences – within reason, of course. Another is to work on identifying those things that cause you to spend in the first place. For example, do you shop to make yourself feel better or because you’re bored? Or is it simply that you can’t resist a bargain? Once you’ve identified your triggers, take practical steps to address them, like phoning a friend for support rather than heading to the mall when you’re feeling down, or going shopping with a list so that you don’t spend more money to enjoy the savings on items you don’t need.

5. Reward yourself

Getting yourself out of debt can be a long-term project and, as with anything that takes time, it’s important to reward yourself along the way – just ensure that your treats and rewards fall within your budget.

Is your family financially protected?

Unfortunately, your debt isn’t simply written off when you pass away – it falls to your estate to cover whatever you owed – so it’s critical that your family is covered financially. Life Cover from Standard Bank’s direct life insurance services pays out a cash lump sum when you die that can be used to clear outstanding debts as well as cover day-to-day living expenses and monthly bills. To find out more, get a quote or ask one of our customer service agents to call you back.

Frank Financial Services is a juristic representative of the Standard Bank of South Africa an authorised financial services provider (FSP11287). Products are underwritten by Liberty Group Limited.

Photo by Christina Morillo from Pexels

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