The rising cost of living, along with soaring interest rates, has placed substantial financial pressure on consumers.
Considering the increasing household debt-income ratio, South Africans should take a critical look at their spending habits and their debts.
According to Marine van Brakel, Chief Operations Officer at RCS, managing credit obligations is an essential budget practice and involves putting together a debt repayment schedule which will allow consumers to keep their credit spend and repayments in check.
Van Brakel said: “Holistic budgeting is about taking practical steps to avoid falling into the vicious cycle of over-indebtedness. While credit may provide much-needed relief in times of financial constraint, ensuring good credit health is the cornerstone of ensuring financial wellness.”
Here are 4 tips to help you start a debt repayment schedule:
Start with the all-important list
Van Brakel said that the first step to starting a debt repayment schedule is to make s list of outstanding and upcoming debts.
The list should include:
– the amount of money owed;
– the current interest rate being charged on that debt by each respective credit provider;
– all debts, including money owed to family and friends;
– formalised forms of debt such as student loans, mortgages, personal loans and store credit.
It may be useful to list these debts in a table format, arranging them in order of size, starting with the smallest debts first.
“Having your list of debts in a consolidated, tangible format will help to expel some of the anxiety that may be associated with being in debt. This will also provide consumers with a solid foundation for a realistic plan of action,” van Brakel said.
Be consistent about making payments
After the list has been created, van Brakel recommends that people start by paying off the smallest debts first.
“These small wins will help you feel more in control of your financial wellbeing. It will also provide you with a sense of accomplishment as you work your way to paying off your larger outstanding amounts,” van Brakel said.
Another approach would be to make consistent payments against the credit facilities that have the highest interest rates to avoid accumulating unnecessary large amounts of interest over time.
Van Brakel said that the rule of thumb when paying off debts is always pay the minimum amount due, but where possible, try to pay more than the required instalment.
Review how you spend your income
The next step is to set up measures that will help you to manage your cash flow more efficiently.
This can be done in two ways:
– finding a way to earn extra income or
– looking to see how you can reduce your monthly expenses.
According to Farzana Botha, Segment Solutions Manager at Sanlam Savings, whether its inheritance, a bonus, investment returns or winning a competition, any extra income should be used to service your debt.
Van Brakel said that people should make a conscious decision that any extra income will be allocated to debt repayment for at least one year.
One debt at a time
The last step is to focus on one debt at a time while trying to pay slightly above the minimum amount on all your debts consistently every month.
“Trying to tackle all the debts on the list at the same time can be overwhelming, but when focusing on one debt at a time, you can manage that specific debt more effectively,” van Brakel said.
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