A STRATEGY TO DITCH YOUR DEBT
Credit is a double edged sword. On the one hand, it gives you access to money when you really need it, but it also puts you in debt, which can be a slippery slope if not managed well. Once you are in a downward debt spiral, it’s difficult to get out. One loan leads to the next, and before you know it you are drowning in interest and fees.
That’s not to say that getting out of debt is impossible. Almost everyone is able to reduce their debt or get out of it completely with a solid plan of action and a little discipline. Maybe you’re ready to get out of debt but not sure where to start. Here we collaborated with Old Mutual to give you the steps needed to take to turn your financial situation around.
Get into the right mindset
A big part of getting out of debt is about being in the mindset and having the discipline to make necessary changes. It means cutting out luxuries for a while, and it certainly means avoiding more debt (yes, it’s time to cancel your favourite store account). You need to realise that if you’re going to get yourself out of debt, you need to commit to it completely.
Budget wisely and save
Once you have wholeheartedly committed to the challenge of getting out of debt, your next task is to create a budget. This might be another reality check for you, but don’t worry – the process itself is relatively simple.
Identify what’s essential, what’s a luxury, and prioritise which are important
Let’s be honest, now that your cellphone contract is up for renewal, do you need the latest iPhone? How often do you actually make use of your gym membership? Write up a list of all of your monthly expenses and see which are truly a priority for you. This is a good time to start being honest with yourself and cutting out the things in your life you just don’t need.
Draw up your budget
Now that you have a list of monthly essentials, it’s time to categorise them. For example, you could have debit orders, transport and rent as categories. While some of these expenses will be the same month to month (your rent for example), you need to keep an eye on how much you spend in the other categories. Set realistic limits for each category and stick to them.
Make your money last
Once you’ve created a budget, gotten rid of the unnecessary expenses, and cut costs to the best of your ability, you might be surprised how much further your money goes. You can even stretch it further by opening a low-cost bank account, buying items on sale or saving on grocery spend by buying in bulk. Do what you can to make your money go further because the less you spend on your monthly essentials, the more you can put towards paying off your debt, and the sooner you can be debt-free.
Put money away into an “untouchable” fund
We don’t mean totally untouchable, but it’s important to have money saved in an emergency fund – kept purely for emergencies. If you can build this up adequately, then you won’t need to rely on loans for bigger-than-usual emergency payments (doctor’s bill, burst geyser, car repairs).The ideal amount needed will differ from person to person and relies on may variables – such as the scope of your medical aid (if you have one). Draw up a list of things that could happen and build up this budget based on the most expensive of them.
Improve your credit rating
Your credit score influences the interest rate lenders are willing to give you. The worse your credit score, the riskier you seem as a borrower, and the higher your score, the safer you seem. Given that you might need to take out a loan for a bigger-than-usual emergency expense (one that your emergency fund would cover completely), it would be a good idea to improve your credit score so that you don’t have to deal with high-interest rates for any future loans you may need,
Consider other options to get out of the red
If you find yourself struggling to make repayments on time, you might want to consider restructuring your debt with a debt consolidation loan. This type of loan allows you to put all of your smaller debts into one bigger loan. These reduces the number of admin fees that you pay and it can bring down your monthly installments to a point you find manageable. This way you can avoid late payment charges and any further damage to your credit score.
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Old Mutual offerings are made available through Old Mutual Finance (RF) (Pty) Ltd, a Licensed Financial Services and Registered credit provider (NCRCP35).