With the new year around the corner, you may be resolved to get your finances in order, and to spend the next year growing your net worth.
So how would you go about doing this? We find out what you can do to stay away from bad debt, and we consider some resolutions that will keep you on the right path.
Why should you be cautious of debt?
According to Ramona Singh, administration director and registered debt counsellor at Infinite Life, debt puts unnecessary pressure on household finances and can ruin relationships.
“If you fall into the trap of taking on credit, it is very difficult to stop,” says Singh.
She points out that debt costs money, and she advises that you think about how much initiation fees and interest will cost you in the long run.
“When you start feeling overwhelmed with your debt, the best advice I can offer is to seek professional help via a financial advisor or debt counsellor. Start living within your means and avoid taking on any new credit, as tempting as it may be,” says Singh.
Try these tips to stay away from debt
- Budget every month: Budgeting is often taken for granted but it should be a top priority if you want to avoid financial problems in the new year. Make sure you budget for your living expenses, insurance policies, savings, and non-negotiables before considering the nice-to-have items. Did you know there are alternatives to traditional budgeting?
- Stop impulsive spending on big sales: Throughout the year, consumers are enticed by “not to be missed” offers. It’s important to avoid spending impulsively and buying things you didn’t budget for just because they are on special. Make a list of what you need and only take advantage of discounts if they relate to items on your list.
- Educate yourself on what bad debt is: Debt is officially classified as ‘bad’ when payments are missed, and the account goes into arrears. ‘Bad debt’ can also refer to unnecessary debt that does not increase your wealth in the long-term – an example could be a retail store account. Elements that can be considered as bad debt if not managed properly are credit cards, cash advance loans and retail store accounts.
- Know and maintain your credit score: Some debt will help you build up a credit history. This will assist you when you are in the market for a big-ticket item, such as a home loan. Make sure you maintain a good credit score by paying your financial obligations on time.
- Speak to a financial coach: Speaking to a credit coach about your finances can guide you in the right direction when it comes to working with your income.
Five resolutions for the new year
1. Reduce your debt
Once you’ve paid all your minimum instalments, put as much extra money as possible towards your smallest credit card balance. Continue until that balance is paid off – then tackle the next smallest balance.
This strategy will not only help build your confidence as each account is settled, it’ll help your credit rating too. Be patient. It will take time, but the end result of being free of debt is worth it.
2. Live within your means
Start with knowing how much money you make and then work out your expenses. Work out which expenses are flexible, such as clothes, food, and entertainment, versus fixed expenses, such as car insurance, rent, or home loan repayments, and medical aid, which remain the same each month.
Find ways to reduce your flexible costs. This may include shopping at a cheaper grocery store, choosing affordable entertainment, and managing your electricity bill by turning off lights in rooms that are not being used.
3. Explore debt-free payment options
Credit is expensive. Shop around, not just for the best deals, but to use your money effectively without incurring debt. Become a savvy shopper by using an interest-free payment option which maximises your cash liquidity. In this way, rather than using costly credit, you can create extra funds to squash those debts once and for all.
4. Save for a rainy day
Set savings goals. Start small and put money away in a separate account. You will be amazed at how much better this will make you feel. Regardless of how much you’re paying off, saving helps create a buffer to avoid future debt traps.
Accompany this with a new attitude where you start seeing yourself as a person who is getting on top of their finances. The trick is to focus on what you want while taking proactive baby steps to put a percentage of your income away in a separate account.
5. Increase your income
Finding a new way to bring in additional income can help you pay off any debt faster and provide you with greater flexibility when it comes to spending and saving. This may mean getting a raise or finding a different job. With the online world at your disposal, you can create a side hustle, offering your particular skill set both locally and abroad.
Article credit https://www.justmoney.co.za/news/2020/12/30/new-year-resolutions-to-help-keep-you-away-from-bad-debt/