Steps to busting your debt

2012-09-07 14:41

Getting into debt is a lot easier than getting out – but it’s not impossible.

We get into debt because we make purchasing decisions on the basis of instant gratification, and on a false belief we can repay.

You may think you’re just borrowing a quick couple of grand to cover a cash shortfall, but before you know it, that debt can rapidly snowball.

Financial adviser Bryan Hirsch recalls a recent case of someone borrowing R4 000 in November, only to now owe R9 000 – thanks to legal costs and exorbitant interest rates.

“People don’t budget and only look at their monthly income, believing they can squeeze in a little more credit.

They forget annual or periodic expenses, such as school fees or car services, as well as the impact of inflation creep, which can eat up to 30% of your wages in a few years,” Hirsch says.

“If interest rates were to increase now, many of us would be in serious trouble.”

Eunice Sibiya, programme manager of FNB Consumer Education, says acknowledging you’re in debt makes it easier to address the problem. Here are five ways to get back in the black.

1. Shift to cash
The first thing to do is to change from using credit (whether it’s your card or store credit) to cash.

That means finding real money to pay for things, instead of simply swiping plastic. While this doesn’t reduce your debt, it prevents it from growing.

2. Write down a budget
“Draw up a budget to establish the extent of your debt,” Sibiya says. “Make notes of areas of overspending, where you can save.”

Hirsch adds that every single bill, whether monthly or annual, must be on that list. Adopt a responsible financial plan – and highlight your short, medium and long-term financial goals.

3. Cut your spending
Hirsch says good places to start slashing your budget are insurance policies and medical aid schemes.

“You may be on the Rolls-Royce medical scheme when something far more modest would suit your needs.”

Other common areas for savings are transportation and cellphone usage. Using loyalty programmes for movies, flights and discounts can also help.

If your house has a spare room, rent it out. If your kids go to an expensive private school, negotiate a discount.

Don’t always upgrade cellphone packages, rather downgrade.

Cut down on entertainment, because this is where most waste occurs.

Hirsch says savings of 20% can easily be achieved without affecting your lifestyle.

Once the easy cuts are made, you can start digging deeper.

4. Talk to creditors
“Communicate with your creditors,” Sibiya says. “Explain your financial situation and arrange for reduced payments, if necessary. Then keep to the agreement.”

Learn from previous mistakes and commit to smart financial management.

5. Main policy decision: Save
Keep going with this process until you have personal reserves saved up that cover at least three months’ worth of expenses.

Mark Corbett, CEO of Century Property Developments, a R1 billion-turnover business, attributes much of his ultimate success to this one factor.

“Keep 3-6 months’ worth of expenses as a reserve and put it somewhere very difficult to get at,” he says.

“Only that gives you the freedom to start new activities.”

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