Debt is probably the biggest thief stealing financial freedom from people. Once in the trap of having too much debt, it becomes increasingly difficult to get out of this situation. People are trying to survive to the next payday in order to use their salary to repay debt for expenses they already incurred in the past. Debt prevents people from saving and creating an investment portfolio. High interest rates on debt result in people acquiring more debt to repay debt. Paying interest on debt is essentially making yourself poorer while you make somebody else wealthier. Debt is easily available in South Africa and when the economy is struggling, more people rely on debt to survive and to keep up with their standard of living. As a result of the financial impact of the lockdown period on households, businesses and the economy, it is expected that debt levels will rise. More people will depend on debt to survive this difficult time.
Repaying any debt as soon as possible will certainly contribute largely to creating financial stability and a better financial future. The golden rule when it comes to repaying debt quicker is to pay more than the minimum installment required. Any money that you pay on top of the minimum installment will be allocated to reduce your outstanding capital amount. That is exactly what you want to achieve – reducing the capital balance outstanding. By reducing the capital balance outstanding you will also reduce the interest you will be paying.
The number of interest rate cuts announced by the South African Reserve Bank are certainly bringing welcome relief for many households. It is advisable for people who can afford to remain paying the higher installments to continue to do so. The amount paid on top of the new minimum instalment required will be allocated to the capital balance resulting in the outstanding balance reducing and also paying less interest. That is one effective way to repay debt quicker, especially considering that people are already used to paying the higher installments.
It certainly is not always that easy to find extra money within a budget, to allocate towards repaying debt. What other options can you consider to repay your debt quicker?
- When receiving any once-off amounts i.e. bonus, 13th cheque or refund from SARS allocate the full amount or a large portion to repay debt. You might think this is hard-earned money that you deserve to treat yourself to something nice but the benefits of becoming debt free are priceless.
- Downgrade from your annual holiday trip to a more cost-effective holiday i.e. doing day trips and allocate the money you save to repaying your debt. A cheaper holiday option can still be a lot of fun and it also provide you with the opportunity to teach your children valuable lessons about life, gratitude and saving money.
- Think of something that you do often and spend quite a lot of money on for example buying coffee or eating out. Make a decision to rather allocate the money you would have spent on every third cup of coffee or restaurant to repaying debt. You might think this is such a small amount, but it quickly adds up and before you know it your overdraft or clothing account balance will start to reduce and you have more money left at the end of the month to start investing.
- Make a decision to critically analyze your expenses on a regular basis. Ask yourself: ‘do I need this expense to survive through the month or is it a nice-to-have expense?’ If it is a nice-to-have expense, you should be able to either reduce the expense or cut it out completely. Transfer the money that you save to your bond on a monthly basis.
- Transfer any excess money at the end of the month to your bond. By leaving the money in your daily living bank account you will be tempted to spend it on something that you don’t need. The interest that you might earn on your bank account is also minimal compared to the interest you will save over the long run by repaying your bond quicker.
All of the options listed above encompass money that you are already spending or will be spending once received. It is merely about making a decision to be smart with your money by not spending it but rather allocating the money towards repaying debt. To make this decision easier, ask yourself the question: ‘How will it make me feel to be debt free?’
This article was written by Ronel Jooste for publication in the Kickass Bosslady magazine June 2020 issue.