0High interest rates and soaring petrol costs made 2008 a particularly difficult year. Many people found themselves with more debt than they could afford. But 2009 will give people a chance to reduce debt because interest rates are expected to be cut further. The prime interest rate has already fallen from 15.5% to 14% and is expected go as low as 11% by year-end.
As your repayments decline, use the opportunity to pay off your debt faster. Reducing debt starts with understanding your monthly expenses. Most of us think we know the state of our finances, but right now can you say exactly how much you spend each month? If you don’t keep track of how much you spend, you may find you are sinking deeper into debt every month. Sit down with your bank statement and take 20 minutes to work out exactly what your monthly financial situation is:
- Write down your monthly income based on what goes into your bank account.
- Deduct your fixed monthly expenses, which will probably be debit-order based. This will include items such as your bond repayments, levies, car repayments, phone bills, insurance premiums, gym memberships and medical-aid contributions.
- If this becomes a long list, note the items that are not essential and cancel them.
- Look at your variable expenses – these are usually paid with your debit or credit card. Write these down, you will be surprised how much you spend on clothing, groceries, entertainment and cash withdrawals.
- Now draw up two lists – those things you need (for example – petrol and groceries) and those things you want (for example – entertainment and clothes). Work out how much the needs list costs you.
- Now find cheaper ways to meet the needs. Buying in bulk, going to different shops, paying in advance or joining a lift club are examples of cutting costs.
- Now draw up a list of all your outstanding debts. Choose one or two of these and make it your goal to pay them off within the next six months using some of the money you have saved from your needs list. Once those are paid off, select another debt to pay off within the next six months. Start with the smaller debts, psychologically you will feel better about putting a real dent in those debts.
- Remember, however, to keep paying the monthly instalments on all your debts. If the monthly repayment amount is reduced due to lower interest rates, keep paying the original amount – you will pay off your debt faster at no additional cost.
- Write up a “big event” list. Part of the money you save each month can go towards major expenses that you will face. These can include school fees, holidays and car repairs. Work out how you can fund these expenses.
- It is important to spoil yourself. So, once your needs list is met and your debt goal is budgeted for, take what you have managed to save on your “needs” and spoil yourself with something from the “wants” list.
How to cut bank costs
- l Call your bank and ask it to analyse your bank statements to see if you could benefit from a different bank product. Bundled options that give you a set amount of transactions per month for a monthly fee can save you a great deal of money. For example, in the recent bank inquiry report it showed that someone who worked on a pay-as-you-use basis would have paid R700 a month for the same amount of transactions that Standard Bank offers in its R80-a-month bundled option.
- Check your credit card and the annual fees you pay. Cards such as Virgin Money have no annual fees. If you want to stick to your current bank but want lower costs, remember you pay for the privilege of holding a gold and platinum card. Rather ask for a standard card and save the money. When criminals want to skim a credit card they go for the gold and platinum ones first because they know they have higher limits. So don’t worry about what other people think of you, just think about your wallet.