How to get out of debt once and for all

In her book, What’s Your Move? A Collection of Ordinary Financial Lessons, Nicolette Mashile shares her tips for going financially free. The author and financial expert offers advice on how to “invest in your debt” instead of trying to play catch up.

And as South Africans reel from 6 months in lockdown, job losses and salary cuts now is a good a time as ever to heed this advice as they ask themselves how to get out of debt and what the quickest way to settle debt is.

How to Invest in Your Debt:

A. The Debt-Avalanche Method

1. Find an Additional R1 000 Every Month

2. List Your Debts from Most to Least Expensive

3. Channel the Additional R1 000 Into the Most Expensive Debt

4. Target the Next Expensive Debt

5. Get Proof of Paying Off Your Debts

B. The Debt-Snowball Method

The above method might not work for everyone. Closely related to the debt-avalanche method is the debt-snowball method.

With this approach, instead of listing your debts from the highest to the lowest interest rates, rank them according to the outstanding balance, from smallest to biggest.

Again, find an extra R1 000. Make all the minimum payments as you would normally do on all your accounts, then channel the additional R1 000 into the account with the smallest balance.

Do this until the account is settled, then move on to the account with the second-smallest balance. Do this until you have settled all accounts. Each time you pay off one, you will free up more money to put towards the next debt. Tackling debt using this strategy means that you will pay less interest overall and get out of debt faster. However, it takes time to see results, and you have to keep your eye on the goalposts.

But investing in your debt by paying it off won’t be effective if practised in isolation. What does this mean? Well, you can’t be reducing debt and still living beyond your means with no budget and no emergency savings. The reason you went into debt will always resurface.

C. Cashflow Index (CFI)

Garret Gunderson offers another way of tackling debt repayment which focuses on maximising your cashflow; freeing up more money to get rid of your debts, and getting rid of your most inefficient debt repayments first.

Gunderson believes that this is the best approach to debt repayment, improving your financial safety and security, and ultimately leading to wealth creation. Gunderson’s method uses what is called the Cashflow Index.

The Cashflow Index looks at your expenses arising from debt repayment from a cashflow point of view. In particular, it helps you identify which of your debt repayments are the most ineffective or inefficient at getting rid of each specific debt, so that you can focus on getting rid of inefficient debt repayments first.

Put differently, which debt repayments are you getting the least bang for your buck from? Which ones will be the best to get rid of first, so that you free up more cashflow in order to tackle the other debts?

Identifying which repayments to focus on first will allow you to reduce debt in the most effective way and increase the amount of money you have.

The Cashflow Index can be expressed as an equation: CFI = Outstanding Balance of Loan ÷ Minimum Monthly Repayment

D. Debt Consolidation

There are several ways to deal with debt. Finding the one that works for you is imperative, and I cannot stress this enough. Don’t just ask your Makhi (neighbor) what worked for him and try to apply the same to your life. Assess your own situation. Sometimes this requires another set of eyes; someone who is financially and emotionally external to your situation.

Another option is debt consolidation. This is when you ask one credit provider to group all of your debts together, pay them off on your behalf, and charge you one, consolidated amount for all of the debt. This amount will be charged at one, new interest rate.

Sometimes, people decide to do debt consolidation not because they have too much debt, but because they have too many monthly account repayments, and each one is costing them admin fees. Imagine if you have seven accounts, and each one is charging the maximum R69 per month for admin: you’re paying a total of R483 every month just on admin.

The NCA regulates the amount that financial institutions can charge for admin, but if you have many accounts, you end up paying a lot in admin fees. Consolidating your debt helps to lessen the total cost of these fees.

Remember, also, that the admin fees are included in your outstanding balances, so in fact, you are paying interest on this, too. People also consider debt consolidation because the interest rates they are being charged are too high.

E. Debt Settlement

What happens if you get a tax refund or a bonus and you’d like to settle some debts but don’t know where to start? Debt settlement is another option for tackling debt. It requires that you know all the outstanding amounts owed and have a conversation with your creditors. I know the culture is to avoid the people we owe because we always assume the worst.

Most creditors want to get their money; if not all of it, then at least some. Although it might seem like it, they don’t derive pleasure in having consumers negatively listed at the credit bureaus or in having to deal with defaults and judgments. Having an honest conversation is important.

When they extended the line of credit to you, they did their own due diligence and you came across as someone who could afford to service the debt, so they too take responsibility for the loan; hence if you’re in financial trouble, they have an ethical and legal responsibility to assist you, provided you come to them in time and before they begin to pursue you.

Debt settlement is a viable option to pay off a debt. It’s asking your credit provider to possibly give you a discount on your payment if you can settle the entire debt at once. It’s a negotiation in which they accept a partial payment versus the full balance. Negotiate!

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About the book and author:

In What’s Your Move? Nicolette Mashile, founder of Financial Bunnies and a champion of personal-finance education across the African content, shares stories from her own life and journey with money in order to redefine personal-finance management.

An intimate and deeply personal book, in What’s Your Move? Nicolette talks openly about her experiences with money and the way she was brought up. She shares her beliefs about how our everyday behaviour influences how we manage our finances, and how, in spite of knowing better, we sometimes make the wrong financial decisions.

What’s Your Move? is a challenge: a challenge to you to make a move that will be financially rewarding. A promise to yourself that you are more than capable of managing your money.