When people find themselves in a debt spiral, they should start their recovery by talking to their credit providers to try and renegotiate the terms and period of repayment.
If all feels lost, it may be a good time to reach out to a registered debt counsellor who will be able to guide you on the way forward.
Soré Cloete, senior legal manager at Old Mutual Personal Finance, says the first step is to see where your debt is and what you can pay off first.
The most obvious debt is to be found on credit cards and through personal loans because of the high interest rates charged.
“You do want to have good debt such as a home loan or a student loan because that is how you accumulate wealth. Once you have gotten rid of your bad debt, which influences your credit score, you may even approach your credit provider or bank for better rates on your home or student loans.”
Cloete warns that credit providers will consider your spending patterns over a period of time.
Once you have got rid of your bad debt, you can certainly try to renegotiate the interest rate on your good debt, but it will not happen overnight.
Only enter into debt when you can afford it. If you cannot afford a new pair of shoes, do not give in to impulse spending.
Cloete says that if you cannot afford to repay debt, think twice about putting another person at risk by asking them to take credit on your behalf.
Their problem is eventually going to become your problem.
The basic principle of a monthly budget is echoed by both Cloete and Garnet Jensen, senior director at TransUnion, and was popularised by US senator and former Harvard professor Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan.
The 50/20/30 budget rule divides after-tax income into spending of 50% on needs, 30% on wants and allocating 20% to savings.
Needs include rent or mortgage payments, car payments, groceries, insurance, healthcare, minimum debt payment and utilities.
Wants include dinner and movies out, a new handbag, and holidays.
Savings include adding money to an emergency fund in a bank savings account, making retirement annuity contributions or investing in equities.
Savings can also include debt repayments. While minimum payments are part of the “needs” category, any extra payments reduce principle and future interest owed, so they are in fact savings.
The 50/30/20 rule of budgeting can help to keep spending in check. If spending in one category seems to be “abnormal” – such as for clothing or entertainment, find ways to reduce spending in those categories.