How to start getting rid of your debt

You can start getting rid of your debt if you set financial goals for yourself and draw up a plan so that you can reach these goals. It will not be easy, but it will be worth it once you experience the feeling of being debt-free.

Debtors were worse off in the fourth quarter of 2022 compared to the fourth quarter of 2016. According to the DebtBusters’ Debt Index for the fourth quarter of 2022, compared to 2016, consumers who applied for debt counselling had 33% less purchasing power, a higher debt-service burden and unsustainably high levels of unsecured debt.

While nominal income was on par with 2016, in real terms consumers could buy 33% less when cumulative inflation is factored in. The higher debt-service burden meant that consumers spent on average 63% of their take-home pay to pay their bills before entering debt counselling.

Consumers taking home R20 000 or more used 68% of their income to repay debt, while consumers with R10 000 had a debt-to-income ratio of 125% which means that their debt exceeded their income, with R12 500 due for debts. Those with take-home pay of more than R20 000, had a ratio of 161% which means that their debt exceeded their income, with R32 200 due for debts.

Unsecured debt levels were, on average, 21% higher than in 2016 and 50% higher for people with take-home pay of R20 000 a month or more, a direct result of people using unsecured credit to counter inflation eroding their income.

Claire Klassen, consumer financial education specialist at Momentum Metropolitan, says many consumers now want to know how to get rid of their debts as most of them are severely indebted and would like to escape the debt trap.

ALSO READ: Consumers worse off now than in 2016, as debt counselling inquiries increase by 53%

Budget can help get rid of debt

Klassen says the more you are aware of your spending, the better you will be at preventing a situation where you become overindebted. “In other words, if you know that you cannot afford to pay for the credit agreement you are about to sign for, you will most likely save cash to buy the item instead of using credit.”

She says budgeting is the best tool to view your actual and estimated costs for the month and adjust it for the month ahead. A budget will be able to show immediately if you are wasting your hard-earned money on useless items or whether you are spending most of your money on buying petrol for your car.

If you can curtail this spending, it will allow you to pay more towards your outstanding debt, ensuring that your debt is paid off sooner.

Should you still try to save and invest when you want to get rid of your debt?

“Investing is the next level to generate wealth, but think of it this way: would you go for seconds and start eating another meal when the meal you are currently consuming is not finished yet? It is best to pay off your debts with the bulk of your money.”

She says even if you have extra income to invest, rather settle your debt first because there is interest added to outstanding debts. “When you have paid off your debt, you will be able to start investing.”

ALSO READ: Rising cost of living leaves 38% of SA consumers too broke to pay their bills

Best strategy to get rid of your debt

Klassen says firstly getting a copy of your credit report is probably the best for an overall view of your accumulated debt. Perusing your credit report can show if you are still paying instalments on debt you have paid off already.

It is better to contact credit providers to plan how to cope than to do nothing. “The good news is at this point it is not too late to do something about it. When you see that you are not coping, call your credit providers or bank to report that you are struggling and ask that a reasonable reduced amount be calculated.”

The bank is most likely to assist you and either extend the credit or reduce the instalment, but it is too late when you have already failed to pay your instalments for three months in a row.

She says it is also important to change your spending habits and learn to say no when an institution offers you even more credit. “We are bombarded with offers for credit wherever we go which makes it hard to ignore.”

ALSO READ: Financial lessons from the pandemic years you can use in 2023

Consolidating your debt in your home loan

Whether it is a good idea will depend on your agreement with the bank and it is only possible when the value of your property exceeds the current outstanding loan amount. Klassen warns that you must be disciplined enough for this option to work for you.

“This is only a good idea when you use the funds freed by debt on your home loan to settle the outstanding debt created on your home loan. If you are not careful you will end up paying back more than the property is worth over 20 years.”

She says it is a better idea to pay off the bond sooner with the extra cash on hand.

How do you avoid impulsive buying?

“Make a list of what you need to buy before going to the shop and add the cost per item. Use your budget sheet to remember what the difference is between a want and a need. Once you established the difference between needs and wants, as well as your short-term or long-term financial goals, you are prepared to go to the store to buy.