6-step game plan to becoming debt-free
Francois Viviers, Capitec executive of marketing and communications, says: “When putting together your financial plan for the year, don’t forget to tackle your outstanding credit. Having a plan can help you pay off your debts faster, saving interest and increasing your monthly disposable income. The debt snowballing method is a simple, practical way to do this.”
You may have seen pictures of a snowball rolling down a hill. It starts small, but, as it rolls, it gathers more snow, growing bigger and bigger as it gains momentum. By the time the snowball reaches the foot of the hill, it’s much bigger than when it started.
The same basic idea applies to the snowball method, which motivates you through a series of small wins. You start by paying off the smallest debts with higher interest rates, which gives you more funds to pay off the bigger ones.
From a psychological standpoint, this makes debt seem more manageable and gives you a way to take back control.
Here’s how it works:
1.List all your debts from the smallest amount to the largest amount.
2.Make the minimum repayment on every debt, except the smallest one.
3.Make your smallest debt your biggest priority - repay as much as you can on it to pay it off as quickly as possible.
4.Once you’ve paid off the smallest debt, add that amount you’ve freed up to the next smallest debt.
5.Now repay as much as you can on this debt until it is paid off.
6.Keep going until every debt is paid in full.
It is easy to see why this approach makes so much sense: as you pay off smaller debts, which often have higher interest rates, you free up more money to pay towards the bigger debts, which means you will see results sooner. It’s simple, methodical and systematic. It also forces you to focus on getting your budget out of the red and into the black.
As well as trying the snowball method, Viviers has the following credit management tips for 2020:
* Take credit only for the right reasons. Ask yourself, “will the value of the item outlive the credit repayment period?” For example, buying a computer for your business will allow you to generate an income long after the credit has been repaid.
* Always compare the total cost of credit when taking out a loan. Most people compare only the interest rate, but other costs, such as credit insurance and administration fees, should also be part of your consideration.
* Consider consolidating all your debt into a single loan, this can lead to a lower monthly repayment amount. You’ll also only have one payment to keep track of each month.
* Settle the full outstanding balance on your credit card statement to take advantage of the 55-day interest-free period. This means that if you buy a laptop on your credit card and settle the full amount before the 55-day interest free period ends, you won’t be billed any interest.
* Consider the 50/30/20 budgeting rule where 50percent of your income is dedicated to needs such as groceries, utilities, health and insurance. Thirtypercent to wants such as hobbies, dining out and shopping while the last 20percent is filtered into repaying debt and savings. Capitec