If you have a debt problem, sticking your head in the sand will only make it worse.
You must take steps to address the problem before it gets worse. Follow the steps below to make a realistic plan on how to get out of debt. With a plan, your goal to be debt free will become one you can achieve.
Step 1 – Take stock of your problem
Make a list of all your debts and the outstanding amount you owe and the monthly repayment.
If you want to be sure you have listed them all, get a copy of your credit report. Read more: What is a credit report?
Add up all the monthly repayments and check what remains of your income after you have deducted those repayments.
Step 2 – Consider if you need help
Use your bank statements from the past six months to analyse where you are spending your money. Your banking app may offer a feature that helps you do this analysis.
Consider the expenses you can cut. Differentiate between your needs and wants and cut the wants.
Use the Smart About Money Budget Planner to draw up a “bare-bones budget”, with only your essential living costs, and cut out luxuries such as entertainment, holidays or TV / streaming services, or any other non-essentials on the list.
If your income is not enough to cover your bare-bones budget and your repayments, consider whether you have any savings or assets you can sell in order to settle and / or reduce some of your debts.
It may be that you are living in a home or driving a car that is too expensive for you and you need to adjust your lifestyle to ensure you live within your means and pay off the debt.
You will most likely be better off selling an expensive home or car yourself rather than letting your debt problem get to the point where a bank or any other creditor repossesses it to recover what you owe.
Try your utmost not to use your retirement savings to pay off the debt – you will only create another problem for yourself as you will not have enough for your retirement. You may also lose some of your savings to tax. Read more: Why is withdrawing from my retirement fund a bad idea?
If, after any lifestyle adjustments you can make, your repayments are still too high to leave you enough to live on, you may be over-indebted.
In this case, you may need a debt counsellor to help negotiate a more affordable repayment plan and to go into debt review. Read more: What is debt review?
If you can manage to repay your debt and have enough to live on, but feel you need someone to motivate you and keep you accountable, consider using a money coach or mentor. Some financial advisers also offer money coaching.
You can approach your credit providers and ask for any relief they can offer in terms of a lower interest rate or an extended term. Remember, however, that an extended term is a last resort for when you are in a financial crisis, as extending the term over which your repay credit will mean paying more in interest over the term of the loan.
Step 3 – Find extra money for repayments
If your income is sufficient to live on while you repay your debts, adopt your bare-bones budget and start tackling your debt.
The aim is to break the cycle of the interest on your debt compounding against you. The more you can find to pay into your debt, the quicker you can reduce the interest and the interest that is charged on that interest, and the easier and cheaper it will be to repay the debt.
It may be easier to let your friends and family know your plans so that they can help you to spend less with ideas on how they can help reduce your household expenses or see you socially without spending money.
Use your budget to identify an amount you can devote to paying down your debt faster.
The bigger the sacrifice you make upfront, the shorter the pain will be. The faster you pay down your debt the quicker your interest and the interest on interest will reduce.
The sacrifice you make is worth the peace of mind it brings and eventually when you are debt free, you will have more income to live on as you will no longer be paying interest.
Step 4 – Pay it down until you are debt free
Now use the extra money to repay more than the minimum repayment on your debt each month.
If you have more than one debt, you can decide whether you want to pay off the highest cost debt first or the smallest debt first. Read more: How can I pay off my debt faster?
You may also want to consider whether consolidating your debt may be a good option. Read more: What is a debt consolidation loan? and Is debt consolidation a good idea?
Keeping paying more into your debt until you are debt free.
Step 5 – Stay out of debt
As soon as you are in a more manageable financial situation, set aside some savings for financial emergencies. If you are not prepared for financial emergencies you may be forced to borrow again. Read more: How do I set up an emergency fund?
Sticking to your budget and living within your means is also essential for staying out of debt.
If you do take out debt again, make sure it is only good debt that funds a growing asset like your home or you career and future earnings. Read more: How do I know the difference between good and bad debt?
