How to budget your way out of debt

2011-02-02 10:02

What does it mean to budget your way out of debt? Simply put, you work out how much it would cost you each month to reduce your debt, based on what you earn and what your other financial commitments are. Nobody expects you to pay off your debt in a month. You have to plan repayment.


With a budget, everything becomes achievable as you break down seemingly huge amounts into manageable portions.

Peter Setou, senior manager of education and strategy at the National Credit Regulator (NCR), recommends that you draw up a budget that takes into account all your income and all your expenses.

Once you know how much money you owe, look at which creditors you need to pay first, and how much you will need to pay each month.

Work on reducing the debts that carry the most interest first, then use a calendar to mark off and keep track of all your payments.

“This is like goal setting – you are making a visible dent in your total debt every month. You can track how well you are doing,” says Setou.

Finding the extra cash is a bit like dieting. While you are trying to shed those extra kilos you need to eat fewer calories a day than normal.

However, once you are at goal weight you can eat a balanced diet with a higher ­calorie count which will maintain your weight.

So it is with paying off debt. You need to cut back on things like entertainment, DStv and shopping for clothes until you are debt free.

Then you can adjust your budget to include those things that you can afford without putting you back into debt.

Even for those items – like water, electricity and groceries – that you need to survive each month, you can find ways to save.

You can save on ­water consumption, or save energy at home by using only truly essential ­appliances.

You can also cut down on grocery bills by looking out for store specials.

You can save up to R200 a month on groceries if you shop around and identify specials.

Every saving helps. Then you can put that R200 towards repaying debts.

By “expensive” we don’t necessarily mean the biggest amount – we mean focus on reducing your short-term debts first, because those loans actually end up costing you the most.

These would include micro-loans, credit cards, personal loans and overdraft facilities.

The best return: If the interest on your loan is 25% a year and you pay this off with your bonus, you effectively receive a return of 25% because this is money you do not have to pay to the bank.

Paying off this debt is the best guaranteed return you will ever get from any investment.

Psychological boost: These loans also tend to be for lower amounts, so you can set reasonable goals to pay them off over a short period of time, which is a good psychological boost.

The money that you were spending in paying off these debts, you can then use either to increase the ­repayments on your house or car, or start a savings fund.

Setou warns that you must always pay your home loan. “Never miss your bond repayments because you could sit without a roof over your head.

“This is one instance where borrowing is a necessity and an investment in your future.”

Don’t miss a payment if you can possibly help it, because this will ­affect your credit rating.

And don’t think that missing one or two payments won’t matter – it will ­matter to the Credit Bureau, which determines your credit rating with borrowers.

Don’t impair your ability to borrow in future because you can’t manage your debts now.

Remember that when you borrow money, you still need to budget for this, as you would for anything else.

Borrowing costs money. When you budget for a loan, be sure you can ­afford the repayments.

Sit down and work out how you’re going to budget to repay it. How much will you need to pay each month?

If other line items like rental, electricity, transport, and so on become more expensive, will you still have enough money left over to service the loan?

The petrol price, for example, is set to increase again next month. How will this affect your transport costs?

If you have borrowed for non-essentials such as designer clothes, a holiday or a flat-screen TV, and you haven’t set aside money to fund your children’s education or your pension, this qualifies as irresponsible borrowing.

Unless you’re borrowing for a home or perhaps education, you’re not building your financial future. It’s important that you change that behaviour now.

Says Setou: “Only borrow what you need. Do not take out credit for things you can pay cash for or those that you can save money for and pay cash at a later stage. Borrow only to buy ­assets that appreciate.”

If you can’t afford to repay the loan and still meet your living expenses, you’ll be caught in a debt cycle.

You could end up damaging your credit rating as well as compromising your ability to borrow in the future.

If you fall behind in your repayments, you can be blacklisted and even lose your home or car. So be very careful when it comes to debt. Do you understand the agreements you are signing?

Are you able to repay the debt, given the amount you earn and the terms and duration of repayment?

If you’re in debt, saving may be the furthest thing from your mind. But Setou says that, using the same budgeting principles, you can also budget to save. How is this possible?

Let’s assume you are managing to repay your debts each month. Perhaps you can find R50 or R100 at the end of the month to put in the bank.

You can consider opening a 32-day notice account, for example. R50 may not seem like much, but each R50 adds up.

Provided you can leave that money untouched, you can build up a small saving. Make a place for this in your budget.

The most important tip here is to be realistic about how much you can afford to put away. Don’t plan on ­saving R1?000 if you can only manage R100. R100 is enough.

Do what you can and you will feel empowered. ­Saving at the cost of not repaying your debt makes no financial sense.

This kind of “saving behaviour” is important, not only because it shows you that you can save and you can take control of your finances, but ­because your bank will sit up and take notice.

“This says a lot to your banker,” Setou says. “If your track record shows you made an effort to save, while managing to service your debt, it will stand you in very good stead if you’d like to borrow in the future.”

Octavia Hlatshwayo, debt counsellor and owner of Mzansi Debt ­Counselling, suggests you budget for your creditors first, meet your needs within reason and then apportion some money for contingencies – and that means saving.

“Get your family involved as this will impact upon them too,” she says.

“Share in your household vision to be financially stronger. Allow them to participate and you could find you’re saving in more ways than one.”

» Make a loan term as short as possible – avoid paying over too many months as it will cost you more.

» Don’t be tempted by attractive deals on new credit cards, such as not ­paying fees for a set period of time or offering you points and benefits the more you spend on your card. All debt carries a cost eventually.

» Take advantage of the low interest rates to pay off as much debt as possible. Prioritise your home loan during this time. You could save thousands in interest costs over the longer term.

» Shop around and compare interest rates from different credit providers before entering into an agreement. Use the pre-agreement statement and quotation to help you compare.

» Read the small print. Understand each clause and ask for help if you don’t understand terms and conditions. Be aware of “no deposit” deals, which can be highly expensive over time. Remember it’s your right to be given documents in plain language. This means the contents, meaning and importance of the document must be easy to understand.

» Be aware that interest and fees are regulated by law, so check the interest rate you are being charged.

» Start saving consistently and seriously for your retirement years from the day you start working. Put aside at least 15% of your income every month in a safe investment.

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