By Hester van der Merwe
Debt is a necessary evil. Most of us need to take on debt in order to purchase things that we simply wouldn’t be able to afford otherwise, like a house or a car. Certain debt products like student loans can also be stepping stones towards a more prosperous future.
But when debt starts creeping into areas with double-digit interest rates – credit cards, store cards and bank overdrafts – then it can quickly become a problem. Here’s how to tame your debt and take back your financial independence.
Get to the source
Addressing the root cause of the debt problem is important – you don’t want to work hard to get out of debt only to find yourself back in the same situation a year later.
For many people, the cause often hides in a financial blind-spot, and it’s best to go hunting for that cause in partnership with an adviser who is a Certified Financial Planner (CFP). A trusted adviser will address the issue objectively, without judgement. Judgement is not helpful – it just makes people defensive and you start justifying the debt problem instead of changing your behaviour to fix it.
Cut down on expenses
Start with your budget. Slice it to the bone and get rid of everything that isn’t crucial. This will not affect your happiness, it will actually give you a sense of relief. Be ruthless with the nice-to-haves and look for cheaper options for the absolutely must-haves. You might not enjoy mowing your own lawn or giving up a streaming service on TV, but the truth is that you’ll be fine without a garden service and Netflix. Please don’t cut medical aid, insurance and retirement savings – ditching these will be more costly in the long run. (If you really have no other option, consider downgrading your medical plan, but don’t cancel your medical aid altogether.)
Analyse every debit order that comes off your account. Cancel the nonsense because it all adds up. Then take a long, hard look at how you’re using your credit card. In my younger days, I once froze my credit card in the middle of a five-litre ice cream container. Seriously! Waiting for the card to unfreeze prevented me from making a number of unconsidered purchases and helped me get into a healthier spending pattern. Of course it’s not as easy these days – you can use your card online and via smartphone apps without actually having to take it out of your purse, but the lesson still holds true: Don’t use your credit card for unnecessary purchases. If you do your shopping online, make a list before you click. That way, unplanned items won’t mysteriously make their way into your basket.
You might even have to make big changes. Who needs overseas holidays when you can have a lekker, local break? You’re mostly working from home these days – would you be able to manage with one car in the family instead to two? And speaking about home… Be honest: Can you really afford it? Remember, your primary residence is a lifestyle asset, not an investment. It will never provide income and will always be an expense.
Start paying off your debt
Now it’s time to use every rand you’ve squeezed from cutting expenses and changing your habits to pay down your debt. Start with the smallest outstanding amount with the highest interest rate. Once you’ve paid that off, allocate the full premium you were paying and tackle the next-smallest debt. Give it a try – you’ll be amazed at how quickly your debts start tumbling like dominoes.
Some banks also offer the opportunity to consolidate debt. This certainly makes administration easier and it gives you a feeling of control because you no longer feel as if you’re drowning in a sea of small accounts, but be careful of the interest rate offered for the consolidation – you don’t want to pay more than you would have done.
Talk about it
You don’t have to suffer in silence. Debt is not something to be ashamed of. The more people talk to each other about their personal finances, the less weird it becomes. Look at how people react when you mention that you’ve have gained a few kilos over the festive season – everybody offers their latest diet tips and they flood you with healthy recipes on WhatsApp. But mention a tight budget and an uncomfortable silence ensues, inevitably followed by, “So how’s the weather?”
This needs to change. Remember, you are not the first person to struggle with debt. You are not alone. Just having the sympathetic ear of an adviser will help you relax and look at the issue from a new perspective. Most importantly, don’t give up. Stick to the plan and you’ll be back on track in no time.
Hester van der Merwe is a CFP at Ultima Financial Planners and the Financial Planner of the Year 2020
PERSONAL FINANCE