Quick fixes and short-term savings are not enough to write off debt to see you through a tough economic climate. w&h money expert Jacqui Pile looks at four steps to help you ease financial stress and write off debt long-term.
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Yes you can write off debt! Here’s how…
Step one
Where does your money go?
Balance your budget
Millions of us spend money that we haven’t got, and most of us don’t even know where our money goes. Of course, we know what the big and regular bills cost, but the rest just gets lost in general expenditure.
Reap the benefits
Get a true picture of where your money goes by setting aside time to add up your outgoings over a year, not a month, so you can take into account annual costs, like car insurance, TV subscriptions, holidays, Christmas and birthdays, your cellphone, home repairs, new tyres, furniture and clothes. Not to mention the many other items of expenditure we forget about, like the dentist, beauty treatments and kids’ treats.
Use a spreadsheet (Excel is on most computers) or the online budgeting tool at My Financial Life. Have your credit card and bank statements to hand. If you’re still struggling to work out where your cash is going, download an app, like Pocket Expense by Appxy (Spend Tracker) or Money Manager, and enter all spending on your cellphone as you go.
The new maths
R250 on a family takeaway once a week equals R13 000 a year, OR you could cut almost R300 000 from your home loan over 20 years.
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Step two
Work out your trade-offs
Yes, we must spend less, but that doesn’t mean you have to give up everything. The way to financial happiness is paying down your home loan, having savings and a retirement plan… all of which you’ll be really pleased you did down the line. But life without a few treats is dull. Look at the areas where you have choices and especially look at the small items.
For example, a R30 coffee per day on the way to work adds up to R7 200 a year, and spending R50 in the canteen each day instead of taking lunch from home could cost you R13 000 a year. Instead, that cash could be used to cover your petrol costs or to contribute towards your annual holiday.
Reap the benefits
Creating cash for choices means tight control of your money. Start by setting a budget for each item of expenditure – the figures must be realistic, though, or you won’t be able to stick to it. Divide your spending into:
- Regular bills
At the start of the downturn, we shopped around for every bill, but the numbers of people switching have fallen. See the box on the right for ways to get the best deals. One area that can easily drift and is vital to set a limit on, is the weekly grocery shopping. Buying online cuts temptation and means you’ll be sure of knowing what you’ll pay at the till. - One off bills
These are hard to budget for and the ones that throw us off course: the geyser breaking down, or the car needing repairs. Build up cash savings to cope with these one-off mishaps. Don’t cut back on insurance, and protect your geyser and car with breakdown cover. - Incidental spending
Tend to spend without thinking? Try leaving your cards at home and use a set amount of cash to last all week. Using money instead of plastic makes us all spend less.
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Think you can’t make savings?
On average, each year we waste 10% of our energy bill on gadgets on standby, R2 400 on the wrong cellphone contract, and R1 800 on discarded food.
Step three
Get some target practice
Balance your budget
The downturn means more of us are taking short-term steps to survive at the expense of our long-term security. When the global economic forecasts are bleak, it’s easy to stop looking to our own future… it’s too scary.
Reap the benefits
Problems stop seeming so overwhelming once you have clear targets. Instead of wishing you had no credit-card debts, have a fixed goal of clearing them in two to four years. It’s essential to have achievable and clear targets. Write them down as a reminder to stay on the path to prosperity. Here are three ways to make a difference:
- Short term
Cut spending by R400 a month and save it in a balanced unit trust earning 8%, which could build up to a nest egg of more than R15 000 in three years’ time. - Medium term
Reduce car-finance interest costs by paying off an extra R500 a month. On a R250 000 car with 12% interest, for example, you could save up to R10 000 on a five-year loan, cutting six months off your loan-repayment period. - Longer term
Think of something worthwhile and break it down into smaller amounts so it’s less daunting. Try spending R250 less a week and stick it away into your home loan. If you’re paying off a R1 million loan at 9% interest over a 20-year term, for example, you could shave over R300 000 off interest costs and nearly five years off the loan.
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Step four
Feel good about your future.
Balance your budget
How appealing does that sound? It is possible, but first, we have to stop burying our heads in the sand or hoping that house-price growth and borrowing will see us okay in the end.
Reap the benefits
It may not feel like it now, but this is actually an opportunity. Interest rates are relatively low and the rise of voucher, discount and cash-back reward programmes has taken savvy shopping to a new level. Here are the steps to follow to make your future feel good:
- Have an existing pension?
Ask your scheme trustees or provider for a forecast and details of how a small extra monthly amount could boost your pension. You don’t have to have a pension, but it’s tax efficient – for every R1 contributed, it only costs you 82c, or if you’re a higher-rate taxpayer, 60c. The money grows tax-free and you can take out up to R500 000 cash tax-free when you retire. - Don’t have a pension already?
A mix of other investments gives you more choices. You’ll need some savings for a rainy day, but over the longer term, investments tend to outperform. Stick them in a tax-efficient retirement annuity and add to them regularly. The tax deductions on the contributions are the same as if you’d bought a pension, and the returns on investments are also tax-free. - Prosperity is your third option
Either equity in your family home or a buy-to-let, but you will need to have a big deposit to get a bond. Do the sums to be sure you can deal with any bad debts or in case you aren’t able to rent it out.
