A Debt Free New Year’s Resolution
With 2018 just a few days away, people are asking: “What should my new year’s resolutions be?”
Why not add “Debt Free” to that list and start working on a stress-free life!
With Christmas out of the way, most consumers are usually facing the consequences of the new debt they acquired, which also brings a lot of stress with it.
Taking swift action will definitely help relief stress and also ensure that you have a plan when payments become due. Doing a full assessment of your debt is a good starting point.
When assessing your debt, keep in mind that all accounts are equal, you should not look at an account differently because of the type of account or its value as any missed or short payments will have the same effect on your credit score, regardless of the account type.
Create A Debt Free Plan By Following These Easy Steps:
Work out exactly how much your total NET income is.
Add all the following together:
- Add your salary after deductions
- Any regular commission. To work out average commission, add all commission for the last 6 months and divide the total by 6. This is your average commission amount.
- Add any other regular income. This will be income from rent, investments, maintenance, pension etc.
You now have your total NET income.
Next, Work out your living expenses.
This should be a thorough list of all non-debt related expenses like:
- Rent, water and electricity, fuel, transport, insurance, medical aid, groceries, school fees, cellphone contracts, airtime, data and also bank charges.
- Any other expense you have on a monthly basis.
Finally, add all these amounts together to get your total monthly living expense amount.
Now that you have your total net income and monthly expenses, it is time to work out your total debt repayments and disposable income.
Work out your total monthly debt repayments.
Make a list of all your credit providers and the monthly instalment amount they expect.
- This should be every last person / credit provider you owe money to. Credit Cards, personal loans, payday loans, store cards, loans from friends.
- Now would be a good time to check the interest rates on these loans / cards. If you can get the outstanding balance, great. We will get back to this a bit later.
Add all your monthly debt payments together to get your total monthly debt repayment amount.
Work out your disposable income.
To work out your disposable income, add together your monthly debt repayment amount and monthly living expenses amount.
Subtract the amount from your NET income amount.
You now have your total disposable income amount. This of course, is the amount that is left after all your monthly expenses have been paid.
Save at least 20 to 30% of your disposable income every month, unless it can be used to settle an account fast.
So How Do I Become Debt Free?
Use your disposable income to pay off your debts faster.
Firstly, go back to the list you made in step 4 and arrange all your accounts according to the interest rates the credit providers charge.
Unless there are accounts with a lower outstanding balance and a high repayment amount, the accounts with the higher interest rates should be prioritized.
Pay extra on the account you have identified. The sooner you get rid of the accounts with high interest / high payments, the better.
As soon as you have settled one account, take the instalment amount of that account plus your disposable amount and pay extra on the next account.
What If My Income Is Less Than My Debt Repayments
After you have followed steps 1 to 4 and found that you do not have enough money left to repay your debts, you should follow these steps:
- Look at your monthly expenses and cut out any unnecessary items. Cut out expenses like DSTV, alcohol, cigarettes, domestic helper, gardener etc.
- If, after cutting out the unnecessary expenses and you still can not afford to pay your debt installments, you have 2 options:
Speak To Your Credit Providers
Speak to your credit providers and ask them to reduce your monthly instalments. They will probably help you, but this will be for a short term. Credit providers usually reduce instalments for a period of 3 months. You may even be allowed to take a payment holiday. We really do not suggest this option unless you know for a fact that you will be able to afford the normal instalments a few months down the line.
Contact a Debt Counsellor