Step 1: Stop incurring more debt

Retail therapy may help you to banish the blues, but the shopping high is usually short-lived when you start having to worry about how you’re going to pay all your bills. Avoid window-shopping as it may lead to unwise purchases. Instead, only go shopping when you need to buy essentials, and draw up a list first. Avoid impulse buys. Use a debit card instead of a store or credit card for your purchases.  Debit cards are a convenient way to shop as your savings or current account is debited directly. You can’t spend more money than what you have in your bank account, helping you to manage your spending. If shopping is an addiction and you find it hard to resist the temptation of using your store or credit card for purchases, cutting up these cards might be a financial life-saver. 

Step 2: Define your debt problem and draw up a monthly budget

Make a list of all your debt. This could include car, mortgage, store- and credit-card payments. Your list should also state the creditors (person/business to whom you owe the debt), at what interest rate the debt is being repaid and the period of repayment. Once you’re in the picture you can devise a plan to get into better financial shape.  A monthly budget will help you make provision to pay your creditors. It will also identify non-essential spending, enabling you to cut back on expenses. The more money you save on reducing wasteful expenditure, the quicker you can get out of the black hole of debt. Many believe that you should not have to spend more than a third of your net salary on repaying debt.

Step 3: Pay back the most expensive debt first

The debt with the highest interest rate grows the fastest and you need to get rid of this “expensive” debt first. You might be able to consolidate your debt. The interest on your home loan is usually lower than the rates levied on your credit card. You may be able to use your bond to pay off your credit card debt. Don’t stop paying your other creditors, as you run the risk of being blacklisted or having your home or car repossessed.   You should not attempt to shuffle your debt around without proper financial advice. Speak to your financial adviser. 

Step 4: Engage with your creditors

If you’re concerned that you won’t be able to meet your debt repayments, you need to speak to your creditors and explain your situation to them. Defaulting on your debt will not only affect your credit record, but your debt will balloon even further. By engaging with your creditors, you can work out a realistic repayment plan.

Step 5: Consider debt counselling

If you’re feeling overwhelmed by debt and you cannot pay your creditors, a debt counsellor could help you draw up a plan of action to tackle your debt. Counsellors charge a fee for this service. Find out if your company’s employee wellness programme offers debt counselling for free. If you are placed under debt review, you cannot take on any new debt. Your debt counsellor will approach your creditors on your behalf to restructure your debt. 

Managing your debt during good and bad times

When interest rates are low you may be tempted to buy a bigger house or purchase a more expensive car. However, interest rates on some loans change, as the repo rate moves up or down. Examples include mortgages, car financing plans and credit card payments.  Even if your monthly repayments seem very affordable, you need to consider if you will be able to cope with your debt when interest rates rise again. If you’re in a strong financial position you should make every effort to pay off your debt faster. For instance, you could save hundreds of thousands of rands in interest by reducing the term of your mortgage.  Getting rid of debt will help you save for your future – putting you in the driving seat.