Debt is not always a bad thing. Unfortunately, debt can bring out the worst in us, financially speaking. Instant access to money we didn’t earn is very tempting, but debt obligations often result in a soul-crushing cycle of escalating spending and repayment.

Deep breaths

Avoidance may seem easier than dealing with the reality, but often it also makes the reality appear a lot worse than it is. Once you’ve had a look at your finances and taken a deep breath you can start drawing up a plan of action.

Theunis Kruger, head of unsecured lending at Standard Bank, points out that credit providers also have an interest in helping you pay off your debts. “If you are feeling overwhelmed and finding it difficult to manage your debt, it’s worth remembering that credit providers are normally willing to find a solution to help consumers. Credit providers would rather consider alternatives such as extending the credit period so that customers can manage payments rather than default and never repay.”

He says that being honest about your debt is the first part of taking responsibility for past spending transgressions and starting your road to mastering debt.

Kruger advises the indebted to follow these steps when you realise you might fall behind on repayments:

• Look at your creditors list and set up meetings with relevant creditors.
• Explain your situation and push to adjust your repayment options.
• If one of your creditors is a bank, go to your bank and speak to a financial advisor that is dedicated to helping you restructure your loan.

The cardinal rule of debt repayment

“In paying off your debt, focus on reducing the debt with the highest interest rate first. This saves the greatest amount of interest which, in turn, can be used to pay off other debts,” Kruger advises.

If you aren’t sure which of your accounts has the highest interest rate, get all of your bills together, find the line item that says ’interest’ and underline. If you’ve been throwing your bills away, a quick call to a customer service centre will clear up the mystery. Remember, this doesn’t mean you should stop repayment on your other accounts as that would negatively affect your credit record. Instead, pay back the minimum monthly instalment on your other accounts and put any extra cash towards paying off the high interest rate account.

This is also a good time to cultivate the habit of not spending on credit. Once you’ve identified the high interest rate account, ensure that you stop spending on that account. If you can find the courage, cutting up the card is usually a good way to remove the temptation.

Staying out

Getting out of debt is only one part of your challenge. Staying on top of your debt is a lifelong commitment. Director of TSC Financial Services and certified financial planner (CFP®) Allan Shine says: “When staring the truth in the face a lot of people curl back into fetal position and suck their thumb hoping for better days. Don’t be that person. You are great, so act like it from now on. Spending uncontrollably without sticking to a budget is as destructive as any other bad habit, so own it and make the change.”

He offers the following five financial management hacks to keep you from falling back into the debt hole:

• Focus on a good financial plan and budget ahead: “If there are any product recommendations, talk about how they are remunerated and by whom, so that you can see from a mile away if you are just buying new things you don’t need again.”
• Start a savings account: Have money transferred automatically into your savings account each month. If you spent R500 per month paying off debts, save that money once your debts are repaid, or decided on the biggest amount that you can afford. “Your monthly savings, excluding your retirement contributions, should be 5% to 10% of your income.”
• Get an emergency fund: Shine says you should save three to six months’ salary in a flexible interest-bearing account as soon as you can for emergencies.
• Don’t buy what you don’t need: “Now that you are out of debt, don’t start living it up again. It’s a slippery slope back to bad debt, and it starts with that chocolate you picked up that wasn’t on your budgeted shopping list.”
• Save for big events: “Once you have three to six months’ salary saved, focus on the next thing. You’ll need to buy things like cars, pay for deposits on property to buy or rent, new tyres, schooling, or something to that effect in future. You know they are coming, whether you like it or not, so save for it. If you think you can pay for it when the time comes but haven’t already started saving, you are in denial again and on the fast track back to debt counselling.”
• Stick to the plan: “Build a solid financial plan and stick to it – don’t buy anything that changes your fixed monthly costs without talking to your financial planner first.”

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