A Quick Guide To Debt Reduction

Most South Africans have debt.  Many believe if you can charge it, you can afford it.  But there comes a time when you look at all the bills you have accumulated and think, “How in the world am I ever going to get out of all this debt?”.  The answer is, by putting a debt reduction plan into use.  The more time you allow your credit cards to sit the more debt you will accumulate from finance charges and more purchases.

It’s been  reported that since the first quarter in 2007, consumer debt was more than R760bn.  So you are not alone in the fight to reduce debt.  There are ways that you can beat it and stay debt free.  Many of the things that you will have to do will need the cooperation from your entire household, so keep in mind that if not everyone is on board, then the your debt reduction plan will not succeed.

Figure Out Your Debt

Without including your mortgage, figure out how much debt you have incurred. Include your car, credit cards or any possession that has a balance on it that you will need to pay on.  Utility bills and other household bills do not get calculated but will help you when setting up a budget later on.

Devise a Plan of Action

Now that you know how much debt you have you will have to figure out how much you can pay to each creditor and how long it will take for you to pay it off.
You can start of with baby steps first by paying off one of your small debts. Perhaps cut back on dining out,  DSTV etc. to release some cash. Use this money to settle one of your debts.

For the purpose of illustration let’s say that your monthly payment on that debt  was R200. You now have an extra R200 pm which you can use to tackle your next debt. In no time you will settle that debt as well, since you will be making an extra R200 pm on principal (capital) payments.

Let’s assume  that the second debt you’ve settled,  amounted to additional savings of R400 pm, which will leave you in total now with  an extra R600 pm (R400 + R200)  you can use to tackle the next debt on your list. Then you apply this principle until all your debts are paid off.

This is known as the snowball method and although simplistic in nature, it is powerful in effect.

The problem with having money sit on credit cards is that you accumulate finance charges every month.  If your balance is high, than most of the money you pay towards your debt will most likely go to paying the finance charge rather than the principal

Debt Consolidation Loan

If your debt is really high and you are having trouble paying enough to decrease your balances, consider a debt consolidation loan.

With a debt consolidation loan your monthly repayments on debt will be lower and you will have extra cash available each month. These extra funds you should “invest” into your consolidated loan to pay it off as soon as possible to compound savings.

Stop Adding More Debt

One of the most important things you can do is stop using your credit cards and start living within your means.  Do not rely on your credit cards to help pay for things you don’t have cash to buy.  It’s time to set up a budget and live within those budget guidelines.  Once you have paid off your debt, you will have disposable income again and be able to splurge once and awhile.

Staying out of debt can sometimes feel like you can hardly keep your head above water.  But once you pay off some of your debt you will feel like a weight has been lifted off your shoulders and you can be free.  The most important thing about paying off your debt is to stay out of debt and start putting that extra money away for savings.

For more information on debt consolidation, bonds and other related articles go to www.globalproperty.co.za

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