You are Here > Home > My Debt > An easy debt payment strategy

An easy debt payment strategy

May 12, 2016

Budgeting and knowing where your money is going is all well and good, but how do you use this knowledge to reach the goal of being debt free?

Budgeting and knowing where your money is going is all well and good, but how do you use this knowledge to reach the goal of being debt free? The whole point of budgeting and money management is to help you get in control of your finances, but it’s usually something people only start doing when they have to, in other words, when they are not making ends meet and getting into further debt. So budgeting really is the first step to paying off debt – if you try to tackle your debts before you have done the budgeting process, you will not get very far.

If you’ve spent time analysing your actual spending, I can guarantee you that there will be somewhere you can save money. Whether it’s by cutting back on take-aways, reducing your data usage or finding smart ways to bank, there are always areas of wastage that create a saving opportunity ‒ even if it’s just R500 per month.

When what you owe on your credit cards, store cards and personal loans closely resembles the GDP of a small country, you may feel that R500 is just a drop in the ocean and will never have any impact on reducing your debt levels. The temptation is just to bury your head in the sand and use the R500 for retail therapy instead! The good news is that R500 is far more powerful than you realise.

Debt-snowball method

While editing the South African version of Total Money Makeover by US money expert Dave Ramsey, I came across the “debt-snowball method” ‒ a very powerful tool in becoming debt free.

The concept is very simple: rather than trying to accelerate all your debt repayments, select your smallest debt first and pay this off as quickly as possible. Firstly it’s a great psychological boost to have a debt settled, but secondly, it frees up the money you were spending in repayments on that debt to target your next debt. Once the second debt is settled you have now freed up debt repayments from two loans, added to your R500 budget saving, to tackle your larger debts.

In my book Maya on Money: Implement your Money Plan, I used Dave Ramsey’s snowball method to show how just R500 extra each month could settle R30 000 of debt within two years.

In this scenario you have the following debts:

  • Clothing account R2 000, minimum repayment R200 per month
  • Retail store account R3 000, minimum repayment R300 per month
  • Bank credit card R10 000, minimum repayment R300 per month
  • Branded credit card R15 000, minimum repayment R500 per month

Month 1 to 3
You pay an additional R500 into your clothing account, increasing the payment to R700 pm. Within three months the account is paid off. You close the account immediately!

Month 4 to 6
Use the R700 you were paying into the clothing account to increase your payments to your retail store account, increasing those payments to R1 000 per month. The retail store account is settled within three months. Again you need to close the account to avoid the temptation to use it, otherwise you derail the debt repayment plan.

Month 7 to 14
With the store accounts closed, it is now time to tackle your credit card. Take the R1 000 you were paying into the retail store account and increase your credit card payments to R1 300. Within nine months your credit card is paid off. Either close the account or reduce your credit limit to just R500. Credit cards can be useful payment methods but only if you transfer money in at the beginning of the month.

Month 15 to 23
The R1 300 used to pay off the bank credit card is now used to add to the repayments on the branded credit card, bringing the repayment amount to R1 800. Within just nine months this card is paid off.

22seven

You are now debt free after finding just R500 extra each month in your budget. This assumes of course that you stick to your budget and do not take on any other credit during this period. Not only are you debt free but you have R1 800 of disposable income to start investing.

Track your Net Value

Hopefully this exercise will provide some motivation to start with that budget. If you have been using the 22seven app to get your budget going, you can use it to track your Net Value which is a graphic illustration of money you have and money you owe. As you settle that debt, so your Net Value will grow. For more information on how the app works, watch this video.

This article is part of the Show Your Money Who’s Boss campaign, a collaboration between 22seven, City Press and Maya on Money.

0 Comments

Trackbacks/Pingbacks

  1. 20 ways to be savings savvy - SASI #waystosave builds savings knowledge - #WaysToSave - […] Type, Balance, Payment, Interest, Fees, Credit Insurance, End Date.  Fisher-French recommends the  Snowball approach to settle your debts: Take…
Maya Fisher-French author of Money Questions Answered

Previous Articles

SARS issues guidance on crypto assets

On 27 August 2021, SARS provided further guidance on the correct tax treatment of crypto assets and how this must be declared in people’s tax returns. SARS published a document on its website entitled Crypto Assets & Tax. The publication should perhaps best be...

Self-service facility for GEPF members

Technology is making it easier for GEPF members and pensioners to keep track of their pension information and claims process. By downloading the new GEPF self-service mobile app onto your device, you can remove the frustration of standing in long queues at GEPF...

Video: Being rich vs being wealthy

In his book The Psychology of Money, Morgan Housel writes about the difference between being rich and being wealthy. He defines riches as an income you earn, because that allows you to take on the debt to buy that R800 000 car or R40 000 handbag. Wealth on the other...

High-risk land investment leaves angry investors out of pocket

Many South African investors who bought UK property developments through SA-based property marketing company SJ Capital, have seen no returns for over 11 years. Investigations have found that the investment is extremely high risk and that investors were not fully...

Listen: Top tips for financially savvy kids

Maya (@mayaonmoney) chats to certified financial planner Gugu Sidaki (@gugusidaki) about ways to skill our children so that they can better manage money as adults. Gugu is author of My 3 Piggies, a series of books for kids all about money. Also listen to this podcast,...

Treasury’s solution to early withdrawal

As part of its ongoing retirement reform process, National Treasury is proposing the introduction of a two-bucket retirement system to provide for shorter and longer-term needs. John Anderson, executive at Alexander Forbes, says it may work along the same percentages...

Video: Marriage and money

When couples marry, including Customary Marriage, they will automatically be married under community of property, unless they sign a separate antenuptial contract. This is seen as a way to protect women, especially those who stay at home to raise the family. The term...

The NSSF will not meet the needs of South Africans

While noble in its aim, the establishment of a National Social Security Fund (NSSF) is largely unworkable. In August, the department of Social Development issued a Green Paper on Comprehensive Social Security and Retirement Reform, which outlined a “super fund” to...

Life insurers see a 44% jump in death claims

Death claims statistics released recently by the Association for Savings and Investment South Africa (ASISA) have shown a massive 44% jump in lives lost with an overall increase of 64% in the value of claims paid compared to the previous year. Between 1 April 2020 and...

Video: Your money behaviour

Have you ever wondered how your money behaviour compares to that of your peers? Where do they save? What do they spend their money on and how much debt do they have? On this edition of Money Matters, we chat to Akash Dowra, Head of Client Insights at Discovery Bank,...

Pin It on Pinterest

Share This