Build a bridge to financial security, chip away at debt

By Cheryl Benadie Time of article published May 6, 2020

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LIFESTYLE - Millions of people across the globe find themselves in the same boat during the pandemic, wishing they had listened to the financial management advice they had heard for years: live below your means, build an emergency fund, limit consumer debt.

You might be one of those people - especially if you are facing retrenchment or experiencing salary cuts as a direct result of the pandemic. Still, it is never too late to establish healthy financial habits and navigate through the current challenges.

Get a clear view of the current situation

Make a list of every cent you owe: mortgage, car loan, student debt, store cards - even money borrowed from friends or family. This first step in money management is often scary because we can’t bear to face the consequences of our actions, in black and white. However, we can’t address what we don’t acknowledge.

Create a zero based budget

Most people don’t stick to a budget. One way to overcome the dreaded “B-word” is to think of it instead as a spending plan. During this crisis period, this is your lifeboat to help you stay afloat.

A zero-based budget means that you assign every rand to an item on your budget. Eliminate categories such as “miscellaneous” because many non-essential purchases will be sucked into this budgeting black hole.

Pay off debts using the debt snowball method

The first rule of eliminating debt from your life is: stop getting into more debt! It might be tempting to consider taking on high risk, high interest loans to alleviate the immediate pressure.

Steer clear of this, as it will only add to your credit risk and increase stress in the long term.

Paying off your debt using the avalanche method (largest to smallest payments) often takes too long to see any progress and its easier to get off track. The snowball method is a slow and steady approach that replaces negative financial patterns, with positive habits, over the long-term:

Now that you have listed all your debts, from smallest to largest, take any surplus money from your spending plan and add it to the minimum payment of your smallest debt. If you don’t have any surplus in your budget, look for areas you can cut non-essential spending, such as clothing, make-up, etc.

Once you’ve paid off the smallest debt (perhaps a store card), close the account, cut up the card and take the money you were paying to that debt and add it to the minimum payment on the next debt on your list (credit card, for example). Repeat until all debts are removed from your spending plan and a wonderful phenomenon called “disposable income” returns to your hard-working spending plan.

Make arrangements with creditors

Fortunately, most creditors are open to making payment arrangements during this time, but you need to take the initiative and contact your bank/creditor.

They may require paperwork, proving loss of income, in order to effect this payment holiday. Find out what your bank is currently offering and chat with them to see if you qualify.

You will need to keep tweaking your spending plan to take any special payments plans into account.

Make sure you do the numbers when agreeing to payment holidays, as extending the timeline of your debt payments may incur additional interest over the lifetime of your loan.

Don’t be afraid to negotiate and ask for agreeable terms.

Create an emergency fund

If you don’t already have an emergency fund, it’s time to establish one. If you’re currently paying off debt, start with a smaller emergency fund (such as R5000 if you’re single and R10000 if you are a couple).

Money saved in your emergency fund should be easily accessible (so not a fixed-term notice account) and used only for unexpected events, such as accidents, death, car trouble, burst geysers, etc.

You will be less likely to stick to the debt snowball method, if you use your surplus money for emergencies.

Start small - even saving R500 a month for emergencies will help to alleviate some financial stress as you focus on getting a handle on the debt.

Redefine the way you work

The shifting job market might mean that you need to take on contract or gig work for a while.

Do what you can to upskill, cross-skill and re-skill yourself so that you can stay competitive.

Learning to master your money, so that you live below your means and stay debt free, will help you to be more resilient in facing challenges.

Benadie is a wholeness facilitator and transformation expert - wholepersonacademy.com

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