Here’s a plan to manage your debt

You cannot begin to save for the future if you do not have control of your finances, and the first thing to do is to control and, if possible, reduce your debt.

FOR most people, some debts are unavoidable. However, you and other South Africans now face a unique challenge: consumerist culture and the relentless selling of instant gratification.

Combine that with easy access to credit, and it becomes the perfect storm of losing control over your finances. That is why debt management is an essential strategy to bring and keep your financial situation under control.

Implementing an effective, ongoing debt management plan can ensure that you:

● Become empowered to manage your financial situation proactively.

● Avoid losing control of your debt.

● Find a way out of indebtedness.

● Stay on track to reach your financial goals.

Carla Oberholzer, debt adviser at debt counselling firm DebtSafe, says:

“Having authority over your finances can turn your money into a powerful ally. But, if debt is left unchecked, it will become your ruthless enemy.”

Oberholzer says an effective debt management plan consists of the following five steps:

Step 1: Revise your financial situation

The first step is to get an idea of your current financial situation. Answer these three questions to get your first debt management step in check:

● What is your monthly income after deductions?

● What does your payment history on your bank statements reflect?

● What does your credit record portray? (Did you know that you can pull your record for free, every year, at any registered credit bureau?)

Step 2: Compare your current income to your debt

The second step is to calculate your current debt-to-income ratio. Here’s how in a nutshell:

● Add up all your monthly debt repayments.

● Divide the figure by your monthly income before any deductions (gross salary amount).

● Multiply by 100 to get a percentage, which will give you your debt-to-income ratio.

Oberholzer says anything above 40% is an alert sign. “The higher the percentage, the closer you are to over-indebtedness.”

Step 3: Prioritise what debt to pay off sooner

Prioritising debt doesn’t mean not paying certain debts; you should still meet all your monthly debt obligations. It means that you identify the most damaging debt to your finances and use your budget to find ways to pay these debts off sooner.

Debts that increase your financial worth should be grouped into “good debt”, and debts with no long-term value can be grouped into “bad debt”.

Step 4: Set up a personal budget

Now that the groundwork of setting up a budget has already been completed, you should continue to keep at it. Here is a basic budget outline that you can start off with:

● Take your money amount that comes in (your net income – salary after deductions such as tax, retirement fund contributions and UIF). Include any extra income, such as monthly commission or rental income.

● Subtract your money that goes out. There will be your essential day-to-day living expenses on things such as accommodation, food, electricity and water, clothes, and telephone.

Then there will be your credit service agreement on your debts, such as your credit card, personal loans, car finance, store cards and mortgage bond.

Thirdly, there will be your monthly contributions to medical aid, insurance policies and any investment policies. Finally, there will be your non-essential expenses such as what you spend on eating out, DStv, entertainment, luxuries and holidays.

● Subtracting what goes out from what comes in equals the money you have left over.

If the final amount reflects a surplus, you can use additional money to pay off your current debt. But, if your amount reflects a minus, you are spending more than you are earning and may have excessive debt, which you will have to tackle proactively.

Step 5: Use your budget to manage your debt

Answer these four questions to make sure you continue to budget properly and manage your debt:

1. What are your financial goals?

2. What debt amounts are damaging to your financial situation, and how are you going to address them/pay them off effectively?

3. What expensive habits or lifestyle choices do you need to get rid of?

4. Do you have an emergency fund? If not, how can you make room in your budget to start building one?

Effective debt management is the key to taking control of your financial situation and it is a life skill you will be glad to have mastered. Take a confident step to get your plan going and keep at it to turn your money into a powerful ally. | Supplied by DebtSafe