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Reduce short term debt with these 5 tips

 In Articles, Short Term Loans

Becoming debt-free is one of the most crucial steps towards a healthy financial future. We cannot plan for retirement, save for a house or investment properly if we have short-term debt. Yet, for most of us, becoming debt-free very difficult. South African’s are among the world’s biggest borrowers as the cost of living increases and the economy weakens. Around a quarter of South Africans say they find it easy to save money each month, with the majority of us owing most our paycheck to creditors. Yet, there are things we can do to help. Friendly Finance has put together some tips to begin the path toward a debt-free life.

1. Evaluate your debt and prioritise

You’re not alone if you have multiple lines of debt. Credit card and personal repayments are just a few bills the average South African will owe each month. To reduce your debt more effectively, you should prioritise repaying the short term that is costing you the most. This is usually the debt with the highest interest rate as the monthly cost of borrowing is bigger. For example, owing R10 000 on a credit card with 20% interest is costlier than a personal loan debt of R9 000 at a 10% interest rate. Repay as much as possible each month (without overextending your finances) to reduce the debt as quickly as possible.

Do not ignore your other debts though – you should still make the minimum repayments each month as a missed payment will be costly.

2. Review your outgoings and adjust

It is important to review your income against your expenditure every month. We can all, at times, be culprits of overspending which consequently makes our financial position less safe. To improve your monthly budget, firstly ensure your income is bigger than your outgoings. If you are spending more than you are bringing home your debt will only worsen. Secondly, try to reduce your outgoings to free up more of your income to pay bills. This is often a very hard process as it means reducing the number of ‘luxury’ items in our lives. However, if you are determined to become debt-free this is a very important step. Below are examples of cost-cutting things you can do to reduce your expenses:

  • Downgrade your cable package
  • Buy to more sale and non-brand groceries
  • Work out and home or outside instead using the gym
  • Pack your own lunch for work instead of buying lunch everyday
  • Reduce the number of dinners you have at restaurants
  • Use a programmable thermostat to not use heating or cooling when you are not at home
  • Cancel unnecessary subscriptions like magazine and gaming subscriptions

3. Generate extra cash

Paying a lump sum of your debt in one go will reduce your monthly repayment amount or the number of months left to repay. To make a lump sum payment you will need to have extra money. If you having savings or investments, it could be worth withdrawing these to repay your debt. You will need to weigh up the benefits of the savings/investments against the cost of the debt to decide whether it is worth doing. For example, if the cost of the debt is higher than the interest being accrued on savings, you may wish to withdraw the funds to help reduce your debt. However, it is not wise to use savings to reduce debt if you are still overspending every month as you will only be facilitating an unsustainable lifestyle that will get you in further financial trouble later.

You can also generate extra cash by selling unwanted possessions. You can sell items online or have a garage sale where all the proceeds are used to repay your debt.

4. Consolidate debt

Money-savvy consumers will know that repaying high-interest debt is not cost effective. If you have several small, high-interest debts you may consider consolidating these to a better rate. There are a couple of options to do this.

  • Balance transfer to an interest-free promotional credit card – credit card providers can offer interest-free periods to new consumers. Making a balance transfer from your existing credit cards to a new interest-free credit card will give you a period where you only repay the principal. Make sure you always meet the minimum repayments as it is often the case that interest-free periods end if repayments are missed.
  • Consolidation personal loan – You could take out a personal loan to repay your existing debt. For example, if you owe R3 000 on credit card A and R6 000 on credit card B, take out a personal loan of R9 000 to completely pay off the credit cards. This will leave you with one monthly payment (much easier to manage) at usually a better interest rate, meaning the debt is less costly.

5. No new debt

There is good and bad debt. A good debt is one that increases your overall net worth in the long term, such as a mortgage.  A bad debt does not increase your overall net worth and is used to purchases good/services with no last value. For example, the desire for unnecessary, luxury purchases play a factor in our bad debt levels. We tend to want things we can’t afford, such as a new car or outfit, and may borrow money to own them.

You should not take on any further debt if you want to become debt-free, especially bad debt. Cut back on luxury items and save up for them rather using your credit card. Your future self will thank you.