Having debt sucks! The stress of dealing with debt can have an unimaginable toll on our lives. We all want to pay off debt, but the ultimate question is always about how to pay off debt faster.
But first, how much debt do I have?
Before we can really start looking at how to pay off debt faster, we need a good understanding of exactly how much debt we have. It’s not good enough to just guess the figures, this requires real action. You’ll need to look for statements, possibly request a credit report, and you may even need to phone some credit providers to get the details.
You want to know about every single debt that you have. Whether it is a personal loan with your family, loans at the bank, overdraft, payday loans, credit card debt or store cards. Also include your home loan and car finance. Anyone or any institution that you owe money to. Get the details.
- how much do you own now?
- are you in arrears? If so, what additional penalties or admin fees are you paying?
- what is your monthly instalment?
- what is the interest rate on the debt?
- how much longer do you have to pay this?
- do you usually pay it off with cash or via a monthly debt order?
You can download this free workbook to help you with this exercise.
Fix your cash flow
Now that you have a clear understanding of your debt situation, you need to fix your cash flow. This means that you need to be able to meet you current obligations before trying to pay off any extra amounts. It wouldn’t make sense to pay extra to your credit card if you can’t then afford to pay the monthly installment for your personal loan.
If you are able to meet your obligations, survive the month and you are not in any arrears, then well done!
If you’re not at this point yet, don’t despair. This is a crucial point to fixing your finances and it could take a few months to achieve.
In order to fix your cash flow I would suggest the following 4 steps:
- Learn about cash flow and budgeting
- Create a budget for yourself
- Resist new debt
Start off by reading this to understand what cash flow is and why it is important.
Watch the videos and use the workbook in the Budgeting 101 series to set up a budget for the month.
Then start working on being able to meet all your obligations and survive the month. Focus on debts that are in arrears and see how you can resolve that whilst still making all your other payments. You may want to phone the institutions where you are in arrears and see if they can assist you with some leniency. They may reduce the interest rate or perhaps extend the payment plan to help you.
It’s important to be strict with yourself in this phase. After a month or two you may feel that you have a little breathing room in your budget and have a little spare cash. That’s great! But…. don’t waste it and don’t take out any new debt.
Also, don’t push yourself too hard to pay off your debt faster until you know that you can manage your finances and survive month to month.
The snowball method for debt
You may have heard of the snowball method for debt before. This is when you look for your smallest debt and pay a little extra towards it until you are able to close it off. Let’s say that you usually pay R120 towards your clothing account, and that you can now pay an additional R100. Once you have paid it all off and closed the account, you would have R220 “spare”. You have been surviving month to month whilst paying this R220 towards debt, so why not keep doing that?
You now look for your next smallest debt and you can pay R220 extra per month towards that one. That’s a nice chuck and you will pay off that debt much faster! And once that is done you have the R220 plus whatever monthly installment you were paying, and you can pay all of it as extra to the next debt.
So remember that you are still paying all your debt installments each month, but you focus on paying off the smallest debt faster. And then use that money towards the next one.
The reason that people like the snowball method for debt is because you will see quick progress. It’s motivating to see a debt being paid off. Makes you feel a sense of achievement!
What is the avalanche method of paying off debt
Another method for paying off debt faster works on the exact same concept as above. However, you start with the debt that has the highest interest rate. This would usually be a personal loan or credit card where the interest rate may be over 20%.
You then pay a little extra towards that whilst maintaining all your current repayments. Let’s say that your focusing on paying off a personal loan of R100k which has an interest rate of 19%. Paying an extra R200 per month may not feel like it will help much. But, it really will! And, if you happen to pay off a small debt while you’re still focusing on your personal loan, then take that installment you were paying, and also pay it towards the personal loan. That way you will certainly pay off your debt quicker.
Both of these methods rely on the fact that you will stick to your budget and not increase your spending as you pay off debts. It’s amazing what can be achieved.
How to pay off debt in a year
Paying off all your debt in a year may not be possible for everyone, but you can certainly make a plan about how much debt you will be able to pay in a year.
Using your list of debts, your budget which has the usual commitments, and any additional payments you can make; create a plan for the year. How much debt will you be able to pay off in the year?
Draw up a list of future payments towards each debt and plan which ones you can close within the year. Set yourself a realistic goal to work towards and enjoy the journey.
How to pay off debt faster
As mentioned, the first step to paying off your debt is to understand all the debt you have. After that you need to ensure that you can survive month-to-month whilst paying all your commitments. Once you’ve got your spending under control and are comfortable with your cash flow, you can really start to focus to pay debt faster!
Don’t be too harsh on yourself though as life may throw curveballs. Unexpected things will happen and your plans may not work out exactly. That’s to be expected.
Always reassess your situation, adjust accordingly, and keep going towards your end goal.
If you debt situation is severe, you may want to consider chatting to a professional debt councilor and perhaps even look at debt review. Here’s a post on what debt review is.