Do you want to be debt free? I know I do.
About 5 years ago I came across a man name Dave Ramsay. What he had to say about getting out of debt made so much sense. Though he was talking about the USA, a lot of his techniques translate relatively well for South Africa.
Snowballing your debt
Dave calls it debt snowballing and it really works, (if you stick to it) I didn’t. Life got in the way and then I got lazy. The one debt I did pay off has stayed gone and the one I partially paid off became more manageable.
I really need to start again.
What he suggested was to add a little extra to your payments each month on just one debt. That extra money reduces your debt and reduces the interest amount charged by the company.
I am going to start with debts that don’t come with with interest, like store cards that you can pay off over 6 months. I am also using rounded numbers because I am not an accountant.
If your debt is R 5000 and your payments are the average of 40% of the balance. Remember this is 6 months interest fee, so your payment requirements are higher. By paying R 40 per month extra, your debt is paid off in 5 months not 6. At the end of 5 months you have between R 500 (if you only use half your payments) to R 1000 (if you use the full amount) extra to pay off your next debt.
Now imagine you are paying off a debt that charges an average of 17% on your current balance and you pay 18% of that current balance over 12 months, lets say R 1000, now add the R 500 from the previous debt to your payment and you will have paid off that debt in half the time.
This technique can even apply to your home loan, which could be realistically paid off in 15 years instead of the traditional 20 years. Imagine the amount you will save!
Where do you start
Start with the smallest debt, this gives you momentum and you see the results sooner. Keep paying the minimum requirement on all your debts. There is no point in defaulting or getting a bad credit rating, while you are trying to pay off your debt.
As you pay off the first debt, put that money on top of the payments for the 2nd debt and then as that debt is finished add the money to your 3rd and carry on until all your debts are zeroed.
Why start with the smallest debt first?
I think R 40 per month is more than a reasonable amount to put towards getting you debt free. It is the cost of 2 take out coffees!
Even just R 10 per month can make a difference. This is the reason for starting with the smallest debt first.
If you started with the largest and could only put in R 10 per month extra, it would take ages to see the difference. R 10 on a R 20 000 credit card debt wouldn’t even make a dent, R 10 on a R 2000 debt is going to show sooner.
Remaining Debt free
Find someone you trust to keep your cards for you, this is so that the temptation to use them once there is a little credit on is minimized.
Only take the cards back once all your debt is paid off, and I would suggest only taking 1 card back and getting rid of the rest. This will not only keep you from getting back into debt but allow you to keep a positive credit rating.
Unfortunately to have a positive credit rating, you actually have to have some debt. So keep one card going with as small a debt as possible and pay it off as soon as you can before adding more debt.
Your credit rating is based on how well you keep up your payments.
When the companies phone to offer you and increased credit limit, always decline. The amount of credit offered is an indication of a good credit rating not an excuse to get deeper into debt.