Debt can be a little bit like your favourite chocolate. In small doses it can be beneficial, and quite enjoyable. However, when overindulged, it has the potential to create lasting issues.
Once you’re overindebted, it’s easy to slip further into debt in an attempt to extract yourself. Unfortunately, this just creates a debt cycle, which is difficult to exit.
However, it’s not impossible, and if you’re in this situation, it’s important to resist the temptation to convince yourself otherwise. We consider some of the most effective ways to regain control of your debt and step towards a solid financial future.
Tip: Did you know debt consolidation can help to protect your legacy, if you're struggling to keep on top of your payments? Find out more here.
Factors that lead to overindebtedness
Overindebtedness typically occurs when your living expenses exceed your monthly salary. One of the leading causes for this, other than overspending, is ever-increasing inflation.
Inflation refers to the rising price of goods, such as groceries. The Covid pandemic, and more recently, the war between Russia and Ukraine, have caused the price of everyday essentials, including fuel most notably, to continuously increase.
Unfortunately, the same cannot be said for South African salaries. According to the DebtBusters Q4 2021 Debt Index, in real terms, income has shrunk by 25% in the past five years. This has led to consumers accumulating debt simply to make it through the month.
Budgeting - the best first step
The best starting point for reducing debt dependence is to create a budget, which, in short, is a record of your income and expenses.
Ayanda Ndimande, business development manager at Sanlam Credit Solutions, advises that when doing this you should keep the 50-20-30 rule in mind. This rule divides your spending habits into three critical categories, these being needs (50%), wants (20%), and savings (30%).
Needs consist of expenses that you absolutely have to pay. These typically include, among others, your rent or home loan, insurance instalments, petrol or public transport fare, debt, groceries, electricity and other utilities. Wants consist of luxuries, such as a night out on the town. Savings include money added, for example, to an emergency fund or an investment vehicle, such as a retirement annuity (RA).
“The 50-20-30 rule allows you to be financially responsible,” Ndimande says, “while still enjoying your money.”
However, she adds an important cautionary message. “It’s possible to think that you are sticking to your budget, but, because of inflation, you are actually moving backwards. It’s important to continually monitor your income and expenses, and adjust your budget accordingly.”
Effective ways to settle debt
With your budget in hand, you can now turn your attention towards debt settlement. The two most popular methods for fast-tracking the process are the snowball and avalanche methods.
The snowball method involves prioritising your smallest debt item. Any funds remaining after you’ve made your minimum monthly repayments will be allocated towards your smallest debt. This method can be more expensive in that your interest might not appreciably reduce, but you will settle specific debts a lot more quickly.
The avalanche method involves prioritising your largest debt item, or the item with the highest interest rate. Once you’ve made the minimum monthly payment for all of your debts, any money scraped together via the budgeting process will be allocated towards your largest debt. This method will result in you paying less interest, however, it will take longer than the snowball method
The method you choose will depend on your situation, and what you feel you will be able to stick to.
Ndimande, says, “credit doesn’t have to be taboo, it’s a reality that we all face. Debt can be managed through access to your credit report and financial education.”
Tip: Ready to address your unmanageable debt? Consider debt consolidation.