Your path from debt to saving

In my previous column (Save your way out of debt), I discussed how you shouldn’t ignore saving while getting out of debt.

Yes, it’s critical to pay off your debt as soon as possible, particularly when it comes to high-interest debt; but at the same time, making no room whatsoever for savings may entrap you in the “never get out of debt” cycle. If you’re used to scrambling from debt to solvency to debt, month after month, you’re psychologically likely to repeat the process as you’re familiar with it.

We all know you shouldn’t compromise your retirement plan to get out of debt — and what is a retirement plan if not savings writ large? Our strategy is to view getting out of debt as a step towards saving, not just a goal in itself.

A plan that suits you
Getting out of debt requires discipline, no doubt about it. But there are a few ways to achieve this proactively and creatively. The first thing to do, though, is to make a list of your debts — that’s unavoidable. Putting amounts down on paper means you can work out your strategy.

If you don’t know what rate of interest you’re being charged on your credit card, store cards and so on, check your account (some accounts will have the information printed) or call the companies and ask. Write down, next to each amount owing, what the monthly interest is. Then calculate what your minimum monthly repayment should be on each account.

Once you’ve worked that out, you have a few options.

You can opt to pay off your highest-interest-bearing accounts first. This has the advantage of paying less overall as high interest means more money to pay each month. And it accumulates rapidly, too, so cutting it down and flattening it will doubtless make you feel a lot better.

You can also opt to “snowball” your debt repayments. So instead of paying the minimum R100 on a particular account, try to increase this to R200 (sacrifice a meal out, or an item of clothing, say). See where you can up your payments each month, which will also reduce the overall amount.

Now you can think about getting creative with your debt repayment plan. Look at your budget and assess where you can honestly and practically cut back without defaulting on other payments.

Redirect your money and, if you’re comfortable, start a savings plan with as little as R100 a month. If your savings run parallel to your repayments, you will know you are doing something positive about your financial future — not just running behind your creditors.

Now you can look at ways to make some extra money. You can sell some of your “stuff” (and we all have “stuff”). Find out where your nearest car-boot sale is taking place; sell online, through Gumtree or kalahariads.net, for example. Go to Cash Converters. You’ll probably find you have quite a lot of “stuff” in your house you’re not using, which could bring in some extra cash (with which you could easily start a savings fund).

Consider extra work or weekend work that will increase your income. You could teach another language privately, for example, or give guitar lessons. If you’re good at craft, knit or sew something. If you’re good at baking, take orders. If you have skills and they are marketable, use them.

Don’t forget to pay yourself back
If you’ve borrowed R5 000 and you have to pay back R500 each month, but you only have R300, you’re falling short. But you have a fixed deposit about to mature. You can certainly use that fixed deposit to flatten the debt — but don’t stop there. Remember that you had a fixed-deposit saving, now you have none.

If you’re financially savvy, you’ll continue to pay the amount that debt would have cost you each month into a savings vehicle, until you have paid back both the capital and interest. In this way, you’re not losing that all-important investment.

The biggest mistake you can make, in terms of savings, is to use your saving without actually paying that amount back to yourself.

Similarly, if you draw down on your access bond to pay for air tickets, for example, pay back more than you need to so you can restore the balance to what it was before you paid for the tickets.

I have a plan. Now what?
Assuming you’re going to adopt one of the plans set out above, what do you need to do to ensure you can honour that commitment?

First, use your plan as a blueprint and continue to review and honour it. If you take on more debt (which is inadvisable), the plan has to be reviewed honestly and adhered to from scratch.

Second, resist the temptation to accumulate debt. Leave your credit card and store cards at home. Some people simply avoid malls and shops so they don’t know what they’re “missing”. Chances are they’re not really “missing” anything — but they are easily misled by shop fronts.

If you shop online and you’re prompted by a website to save your credit card details online, decline. It takes more time and effort to retype your credit card details than to click a single button that denotes “purchase”.

If you already have a credit card and you’re managing it well, resist the temptation to “upgrade” to a more “expensive” credit card. You’ll pay for the privilege.

Remember that there is no “good” or “bad” credit. There is simply “credit”. It’s a service that allows you to purchase goods. What you buy, and how you buy, are key factors. If you buy on a store card and opt for 12 months’ interest, that’s not sensible behaviour — but credit per se is not “bad”.

Finally, remember to focus on the fact that you probably have everything you truly require. Be grateful for what you have. Unless you desperately need something, you can probably take an extra R200 or R500 and set it aside each month as a saving. Unless your money is growing, it is likely stagnating, or waiting to be redirected elsewhere. Don’t just work for your money. Let your money work for you.

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