Words on wealth: your roadmap to financial freedom

Martin Hesse 

Debt is like deceit: a minor transgression can trigger a series of increasingly darker ones, each to cover up the previous one, until the situation is worse than anything you could have imagined. 

On the financial front, the scenario might look like this:

Transgression #1: You don’t pay off the full amount on your credit card because you need to settle an exorbitant dentist’s bill that the medical aid wouldn’t cover.

Transgression #2: You go into overdraft on your bank account because the rising debt on your credit card is causing your monthly repayments to spiral. 

Transgression #3: You miss a repayment on your car loan because you have maxed out both your credit card and your overdraft.

Transgression #4: You take out a personal loan at a prohibitively high interest rate to get your arrears car payments up to date, after some threatening letters from the vehicle finance company.

Transgression #5: You approach another bank for a credit card, but owing to your deteriorating credit profile, the bank politely declines your application.

Deeper and deeper… 

How to break the spiral

You need to act decisively to break this spiral into misery, and the sooner you do it, the easier it is: swallow your pride, recognise the seriousness of the situation, and take steps to turn things around.

Having covered this topic extensively, cobbled with a good dose of common sense, I offer the following get-out-of-debt plan:

•  Admit you are in trouble. If you’re single, this is hard enough, but if you are in a relationship or have dependants, you need to bring them with you on your journey. Explain to your loved ones that you are having financial difficulties. Reassure them it’ll all turn out all right, as long as everyone gets used to consuming less and trying to live more frugally.
•  Determine the depth of the hole you’re in. You need to figure out whether, with a determined effort, you can climb out of the debt hole yourself, or whether you are in so deep that you need professional help. If such a large portion of your income is going towards servicing debt that you don’t have enough left over for the basics, such as food and transport, you probably cannot do it alone and will need to see a debt counsellor.
• Know what’s going in and what’s going out. Going back over the last six months or so, make a detailed list of your income and expenses for each month, grouping your expenses into debt repayments, essential expenses and non-essential expenses. By the way, DStv is a non-essential: you can go without watching the World Cup in the comfort of your home; you can’t go without a roof over your head. That’s already R1 000 a month saved.
• Draw up a frugal-living budget. You cannot be spending more than you are earning, so first, cut back on the non-essentials until expenses equal income. Then you need to cut some more – even a saving of R500 a month will help. Oh, and there’s something else to cut, using a sharp pair of scissors: your store cards and credit cards. You’re allowed to keep your bank debit card.
•  Stick to your budget, with your family’s support. Make positive efforts. Encourage your family with statements such as: “Look how much we’re saving by eating out only once a week!”, or “We pride ourselves on wasting as little as possible and recycling where we can – it’s our contribution to the environment.”
• Now tackle the debt. Put the R500 (or more) you’re saving into paying off the smallest debt with a high interest rate. This is likely to be a store account, a credit card account, or a personal loan. It may take several months to pay off the account, which we’ll call account A. Once you’ve finished paying off A, take the whole amount you were paying on A (the regular repayment plus the R500), and add it to your regular repayments on account B, another account with a high interest rate. When B is paid off, you will have an even larger amount to pay off account C: in addition to the regular payment on C, you add the R500 plus what would have been your regular payments on A and B. Get it? On each successive account, the amount you have available will be more than on the previous one. So you’re turning the vicious cycle into a virtuous one.

Once you’re at a debt level you can live with – the remaining debts should be only the long-term, low-interest ones such as vehicle loans and your home loan, and ideally their combined repayments shouldn’t be more than a third of your income – you can switch to a “maintenance diet”, by still trying to live frugally while indulging yourself now and then. 

At this stage, you might even begin something that you never thought possible: investing.

* Hesse is the former editor of Personal Finance.

PERSONAL FINANCE