An easy debt payment strategy

An easy debt payment strategy

Budgeting and knowing where your money is going is all well and good, but how do you use this knowledge to reach the goal of being debt free?

The whole point of budgeting and money management is to help you get in control of your finances, but it’s usually something people only start doing when they have to, in other words, when they are not making ends meet and getting into further debt. So budgeting really is the first step to paying off debt – if you try to tackle your debts before you have done the budgeting process, you will not get very far.

If you’ve spent time analysing your actual spending, I can guarantee you that there will be somewhere you can save money. Whether it’s by cutting back on take-aways, reducing your data usage or finding smart ways to bank, there are always areas of wastage that create a saving opportunity ‒ even if it’s just R500 per month.

 

When what you owe on your credit cards, store cards and personal loans closely resembles the GDP of a small country, you may feel that R500 is just a drop in the ocean and will never have any impact on reducing your debt levels. The temptation is just to bury your head in the sand and use the R500 for retail therapy instead! The good news is that R500 is far more powerful than you realise.

Debt-snowball method

While editing the South African version of Total Money Makeover by US money expert Dave Ramsey, I came across the “debt-snowball method” ‒ a very powerful tool in becoming debt free.

The concept is very simple: rather than trying to accelerate all your debt repayments, select your smallest debt first and pay this off as quickly as possible. Firstly it’s a great psychological boost to have a debt settled, but secondly, it frees up the money you were spending in repayments on that debt to target your next debt. Once the second debt is settled you have now freed up debt repayments from two loans, added to your R500 budget saving, to tackle your larger debts.

In my book Maya on Money: Implement your Money Plan, I used Dave Ramsey’s snowball method to show how just R500 extra each month could settle R30 000 of debt within two years.

In this scenario you have the following debts:

  • Clothing account R2 000, minimum repayment R200 per month
  • Retail store account R3 000, minimum repayment R300 per month
  • Bank credit card R10 000, minimum repayment R300 per month
  • Branded credit card R15 000, minimum repayment R500 per month

Month 1 to 3
You pay an additional R500 into your clothing account, increasing the payment to R700 pm. Within three months the account is paid off. You close the account immediately!

Month 4 to 6
Use the R700 you were paying into the clothing account to increase your payments to your retail store account, increasing those payments to R1 000 per month. The retail store account is settled within three months. Again you need to close the account to avoid the temptation to use it, otherwise you derail the debt repayment plan.

Month 7 to 14
With the store accounts closed, it is now time to tackle your credit card. Take the R1 000 you were paying into the retail store account and increase your credit card payments to R1 300. Within nine months your credit card is paid off. Either close the account or reduce your credit limit to just R500. Credit cards can be useful payment methods but only if you transfer money in at the beginning of the month.

Month 15 to 23
The R1 300 used to pay off the bank credit card is now used to add to the repayments on the branded credit card, bringing the repayment amount to R1 800. Within just nine months this card is paid off.

You are now debt free after finding just R500 extra each month in your budget. This assumes of course that you stick to your budget and do not take on any other credit during this period. Not only are you debt free but you have R1 800 of disposable income to start investing.

This article is part of the Show Your Money Who’s Boss campaign, a collaboration between 22sevenCity Press and Maya on Money.

Credit: http://mayaonmoney.co.za/2016/05/easy-debt-payment-strategy/