It is that time of year when everybody sets their resolutions for the upcoming year and it usually goes something like this: Lose weight, exercise more, stop smoking. In my opinion, the reason why so many of us do not accomplish our resolutions is because they are not measurable, and they are not accompanied by steps to accomplish them.
- How much weight do you want to lose?
- By when do you want to lose it?
- What specific changes are you going to make to achieve this goal?
- Who is going to keep you accountable?
A goal without a plan is just a dream. Let’s stop dreaming and start living!
The same should be applied to your financial resolutions. I am going to start this series by discussing debt.
Resolution: Reduce my personal debt
South Africa’s Households Debt to Income is projected to trend around 67% in 2023. This means on average we are spending 67% of our take-home pay on debt! No wonder we have such a terrible savings rate. So, if you are one of these people, reducing your debt levels should be a priority for 2023. As I mentioned above, it is not enough to just say that you need to reduce your debt, you need to be specific and set out the steps you need to take to make this a reality.
- Which of my debt do I need to focus on reducing?
- How much do I want to pay off?
- By when do I want to pay this amount off?
Step 1: Understand the product
Not all debt is created equal and not all debt is “bad.” Without debt like a mortgage bond or a car loan we wouldn’t be able to buy those assets. Usually, these type of financing products also come with relatively lower interest rates (depending on your credit score of course).
Several years ago, my husband’s colleague told me that he didn’t pay any interest on his credit card. Of course, I said that this was impossible, and he explained to me that he is repaying the minimum amount every month and his repayments never increase, therefore, obviously, there wasn’t any interest charged. I was completely dumbfounded, but since it was my husband’s work function, I didn’t want to get into an argument and explain that his outstanding balance also wasn’t decreasing by the amount of his repayments, so obviously, there WAS interest being charged.
I think a lot of people do not understand how their products work. The T’s and C’s were just so overwhelming that they skipped to the dotted line and signed without even asking the basic questions.
Step 2: How much can I repay?
Calculate how much you can afford to repay every month. This amount should preferably be higher than your minimum monthly repayment. Make sure you then make this repayment as close as possible to the date that you receive your salary.
Step 3: Leave the credit card at home
It doesn’t help paying off your debt and then just continue adding to it on the other side. Leave your credit card in a drawer or a safe at home (and remove it from your Apple Wallet/Samsung Pay etc). If you don’t have it with you, you can’t use it. As simple as that.
Step 4: Change your limits
To stop yourself from falling into the same debt trap afterwards, change your daily and total debt limits to an amount that can more easily be managed.
Debt can easily become overwhelming, and it is very important to manage it responsibly. You will never be able to start think about long-term savings if you are still drowning in debt.
For any questions or comments, please contact me at firstname.lastname@example.org