If you’re living with what you perceive to be insurmountable debt, you’re likely to feel as though you’re on a treadmill to absolutely nowhere. The money comes in at the end of each month and literally leaves skid marks as it races through your bank account to pay off your various creditors, leaving precious little trace of a salary at all. Running the debt treadmill is hugely depressing and frustrating as the noose of debt grows ever tighter, whilst you’re expected to run ever harder and faster to keep up. What most debt-laden people don’t realise is that there is no need to live a debt-riddled life and that there are (very workable!) ways of reducing and eventually eliminating your debt over time. Living a debt-free life is not some idealistic dream that can only be achieved by the big earners and the clever investors. Everyone has the potential within them to attain a life that is free from debt and the anxiety that comes with it. Like any of your life goals, working to achieve a debt-free life takes dedication, education and aggressive commitment to the cause. But, most importantly, reducing and eliminating your debt takes time. And, believe it or not, of all the factors affecting your ability to be debt-free, time (also known as patience or delayed gratification!) is a significant stumbling block on the road to financial freedom.
Having counselled and advised many clients on their journey a debt-free life, here’s some essential advice:
- Stop being an ostrich: For some people having their teeth extracted would be a more pleasant experience than listing their debt on paper. The reality is, however, that you can either remain an (albeit heavily indebted) ostrich about how much you owe, or you can come clean about your debt. Focus and visualize what your life will be like in a debt-free world. Now take a pen and piece of paper and start writing! When listing your debt, make sure that you list all relevant details including the exact amount owing, who it is owed to, the interest rate payable, the term of the debt, the minimum monthly installment and any other significant factors affecting repayment. If your payments are late in respect of any debt, or if you’ve been handed over, you need to flag these debts. We’ll deal with these debts later.
- Brave your budget: We’ve already discussed the many reasons why people avoid doing their budget in my previous blog, ‘Braving the Budget‘. So, once you’re finished making all the excuses why you shouldn’t prepare your budget, pick up a pen and do your budget! There’s absolutely no point planning an attack on your debt if you don’t know your current position. If you’re avoiding your budget because you have a dreaded suspicion that you’re spending more than you earn, consider (a) that you’re probably right and (b) you can change this! Great, you’ve got your debts lists in detail and you’ve got your monthly budget written out. The next step is to map your debt repayments over a period of time. Here’s how…
- Use a debt reduction calculator: If you’ve never tried a Debt Reduction Calculator, you don’t know what you’re missing! As far as financial calculators go, this is a seriously fantastic and liberating tool. If you want to use the Crue Consulting Debt Reduction Calculator, click here and follow the links. Whatever you do, don’t be put off by this step! Even if you’re the last financially-minded person on earth, you will be able to use this calculator. All you need to do is punch in your various debts, how much interest you’re being charged and your minimum monthly repayments. The calculator will do the rest for you. The great part about this tool is that it calculates both how long it will take you to pay off each debt as well as the time period it will take until you are debt-free. The financial theory behind the calculator is that you slowly start reducing your debt every month. As soon as one of your debts is paid off, the freed up cash-flow will then be channeled towards the second debt. Paying off your debt in this manner creates a snowball effect so that, as each debt is settled, the freed up cash is rolled over to knock the next-listed debt on the head.
- Put your debt in order: As with all things relating to finance and economics, there’s a whole lot of human psychology behind it all! When it comes to paying off debt, the financial gurus will advise you to pay off your debt that attracts the highest interest first. And whilst the financial theory behind this is great, it doesn’t address the human need to feel a sense of accomplishment. Our advice, therefore, is to pay off the smallest debt first. Why? Because you’re likely to settle this debt within a relatively small period of time and this will achieve two significant things. Firstly, you’ll be able to celebrate a small victory early on and this will no doubt boost your morale and your belief that you can do this. Secondly, it will free up cash (i.e. whatever your repayments have been) which you can then use to boost your repayments towards the second-listed debt.
- Be unashamedly aggressive: If you’re adamant you want to live a debt-free life, then you need to attack your debt head-on and in the most unashamedly aggressive manner. If you’re avoiding doing your budget because you have a dreaded suspicion that you’re spending more than you earn, you’re probably right! The bad news is that there are only three ways to fix this equation: (a) spend less, (b) earn more or (c) both. The good news is that you’ve got options! If you’ve done your budget then you’ll have identified at least five ways that you can cut your costs. And if you don’t believe me, then look out for tomorrow’s blog entitled ‘Breaking the spend trend‘. Just a quick example, if you cut out your morning Wild Bean Cafe or Vida coffee, you’ve already saved yourself in excess of R250 per month. That’s R3 000 per year excluding interest! Once you’ve aggressively attacked your expenditure, you may want to consider generating a second income. Although this may sound far-fetched, you will be surprised at the innovative ways in which you can generate a second income. Even a couple of extra hundred Rand per month is going to greatly expedite your repayment plan, so don’t be too quick to brush off opportunities (however lowly!) to earn some extra cash. You won’t need to do it forever.
- Understand your repayment timeline: Make sure that you keep your deb repayment timeline on hand so that you can refer to it regularly. By understanding exactly when your next ‘victory’ is planned for, you’ll avoid any potential disappointment along the way. Plot your victories, celebrate them when you achieve them and them refocus on the next debt scheduled for elimination.
- Have an Emergency Fund: A sure-fire way to derail your debt repayment plan is to not have an Emergency Fund. An Emergency Fund is designed to provide you with instant access to capital in the event of those unexpected, unanticipated eventualities – such as suddenly needing a new set of tyres on your car. If you haven’t already done so, ensure that your monthly budget includes an allocation to your Emergency Fund. Having an Emergency Fund means that you won’t have to dip into your credit card if you suddenly need extra cash. Accessing your credit card that you’ve been trying hard so hard to pay-off will present you with a serious emotional and financial setback.
- Be on time: Whatever you do, ensure that you pay your bills on time. Late payment of your bills can only be higher interest rates, penalty charges and more debt, so set aside a day (and time) every month to do your banking and make all your payments.
- Talk to your creditors: If there’s one thing a creditor dislikes more than a late payer it’s a late payer that doesn’t communicate! Let’s face it: all creditors want their money back and most will be prepared to negotiate extra time if you’ll just talk to them about it. They’ll appreciate a phone call or e-mail from you more than you can imagine, and most creditors will be more than willing to help you if they know your’re serious about paying your debt back. Knowing that you’ve got a personal repayment plan will give them comfort that you’re managing your finances and that you have every intention of settling your debt.
- Be careful with debt consolidation: As a general rule, if something sounds too good to be true, it probably is. Debt consolidators advertise the most incredible terms and benefits for ostensibly low fees, if any. The reality, though, is that if you have a budget, a debt calculator and a tenacious desire to be debt-free, then you don’t need a debt consolidator. Over and above this, you need to learn to take personal responsibility for your spending, your finances and your debt, so there’s nothing to be gained personally by outsourcing your financial responsibilities to a fiscal nanny – and getting nailed by hidden costs and insurance while you’re at it. If you want control of your financial life, take control – don’t outsource it!
Let’s be honest here. If you’re struggling with debt, there’s probably multiple underlying issues that need to be addressed which have, no doubt, resulted in your current debt crisis. Whether it’s impulsive buying, compulsive shopping, fear of money, sheer ignorance of how dangerous credit is, failure to budget or irresponsible spending, it’s as important to address the psychology behind your debt problem (if not more important) than to address the financial fix you’re currently in. If you don’t address the behaviour that is triggering your debt problem then (even if you attain your debt elimination goals) there’s a strong likelihood that, over a period of time, your debt will once again accumulate. If you’re going to launch an aggressive attack on debt, why not be unashamedly aggressive about your own shortcomings at the same time.
There’s absolutely no point waging war against your debt if you’re content to settle for a few short-lived battle victories only to lose the overall war which could be victoriously yours.