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5 Steps on how to change debt from your ruthless enemy into a powerful ally

South Africans face challenges of a consumerist culture, unexpected financial curveballs and the relentless selling of instant gratification.

South Africans face challenges of a consumerist culture, unexpected financial curveballs and the relentless selling of instant gratification.

Published May 5, 2022

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Debt is an unavoidable part of the human experience. Moreover, you and other South Africans now face a unique challenge; consumerist culture, unexpected financial curveballs and the relentless selling of instant gratification. Combine that with easy access to credit, and it becomes the perfect storm of losing control over your finances.

That is why Debt Management is an essential strategy to bring and keep your financial situation under control.

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Continuously implementing a Debt Management plan, can ensure that you:

  • Become empowered to manage your financial situation pro-actively.
  • Avoid losing control of your debt.
  • Find a way out of indebtedness.
  • Stay on track to reach your financial goals.

As Carla Oberholzer, debt adviser at DebtSafe highlights:

Having authority over your finances can help you experience true financial freedom and turn your money into a powerful ally. But, if debt is left unchecked, it will become your ruthless enemy.”

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With this being said, what are the five steps to carry out a successful Debt Management plan?

Step 1: Revise your financial situation

The first step is to get an idea of your current financial position. Answer these three questions to get your first Debt Management step in check:

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  1. What is your monthly income after deductions?
  2. What does your payment history on your bank statements reflect?
  3. What does your credit record portray?

**Did you know that you can pull your record for free, every year, at any registered credit bureau?

Step 2: Compare your current income amount to your debt amount

The second step to proper Debt Management is to calculate your current debt-to-income ratio.

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Here’s how in a nutshell:

  1. Add up (+) all your monthly debts,
  2. Divide (÷) it by your income amount before any deductions (gross salary amount),
  3. Multiply (x) by 100,

And, your total/the final percentage (= %) will then give you your debt-to-income ratio.

**Note: Any percentage above 40 is an alert sign. The higher the percentage, the closer you are to over-indebtedness.

Step 3: Prioritise what debt to pay off sooner

Prioritising debt doesn't mean not paying certain debts; you should still meet all your monthly debt obligations. Prioritising your debt means that you identify the most damaging debt to your finances and use your budget to find ways to pay these debts off sooner.

Debts that increase your financial worth should be grouped into "good debt", and debts with no long-term value can be grouped into "bad debt".

Step 4: Set up a personal budget

Now that the groundwork of setting up a budget has already been completed, you should continue to keep at it. Here is a basic budget outline that you can start off with:

  1. Take your money amount that comes in (your net income – salary after deductions such as TAX or UIF). Including any extra income (monthly commission, or rental income, for example).
  2. Minus (–) your money that goes out (your expenditures – debt/credit agreements, service agreements or standing payments such as living costs or obligations not usually paid via debit order.
  3. Plus (+) your monthly savings (investments, pension fund, retirement annuity and related), or other savings (short-term savings, such as savings for education or an emergency fund).
  4. Equals (=) your money that you have left over
  • If the final amount reflects a surplus, you can use additional money to pay off your current debt.
  • But, if your amount reflects a minus, you have excessive debt which you will have to tackle proactively.

Step 5: Use your budget to manage your debt & if needed, get professional help

Answer these five questions to make sure you continue to budget properly and manage your debt accordingly:

  1. What are your financial goals?
  2. What debt amounts are damaging to your financial situation, and how are you going to address it/pay it off effectively?
  3. What expensive habits or lifestyle choices do you need to get rid of?
  4. Do you have an emergency fund? And if not, how can you make room in your budget to start building one?
  5. What other solutions have you taken into account (after trying everything to lower your debt pile, but still facing severe debt and stress)? This includes various solutions to consider: speaking to your financial planner and banker, OR considering a legal, no-loan debt consolidation process under the National Credit Act, called Debt Review/Counselling that can help you reclaim financial freedom again.

Effective Debt Management is the key to taking control of your financial situation and it is a life skill you will be happy to have mastered. Take a confident step to get your plan going and keep at it to turn your money into a powerful ally.

Related Topics:

Money MattersFinance

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