Effective debt management tips

1. Know who you owe money to and how much

If you are feeling overwhelmed by debt, one of the first steps you’ll need to take to organise your finances, is to determine exactly how much debt you owe, and to whom. Keep an up-to-date list of all your debts, including creditors, total amounts, monthly repayments and deadlines.

A spreadsheet can be most helpful as it will encourage or compel you to keep your financial obligations up to date. Taking the time to document balances and payment amounts will save you some time later, and help to prevent late payments.

2. Put together a monthly budget

An effective budget helps you see how much money is coming into your account and how much is going out. You’ll get an idea of what you actually end up with every month, and how much of your debt you can afford to repay monthly.

3. 3. Decide which debts to pay off first

Prioritize your debt list. Deciding which one to tackle first can be a challenge, but it’s worthwhile to cross them off your list in the right order.

Some types of debt are more expensive than others, so target the debt that carries the highest interest rate first, and which is costing you the most. Your credit card is often the main culprit. Paying this off first will allow you to save money in the long run.

4. Pay what you can

While paying a little extra than what you owe every month is ideal – you’ll pay off your debt faster – it’s not always possible. But at least make your minimum monthly payment, to ensure your debt doesn’t grow.

Again, remember to prioritize paying off additional amounts on interest-bearing accounts first. Some clothing accounts, for example, offer six-month interest-free payment plans, pay off the accounts that charge interest first.

Missing monthly payments makes it difficult to catch up. If you fail to pay for several months in a row, your account may go into default, which has serious consequences. A minimum payment will stop your debt from growing and will keep your account in good standing. You can always pay more when extra cash is freed up later on. Opting for monthly debit orders can help you keep on track.

5. Curb irrational or impulsive spending

Set aside an amount you can afford monthly to devote to luxuries or indulging. Creating this small splurge fund or adding a category for indulgences in your budget will allow you to spend money on things you really want, because you only have a set amount to spend.

Understand your triggers for impulsive spending and devise a strategy to avoid them. For example, set aside a limited amount to go grocery shopping – and a list – so you’re not tempted to window- shop and end up buying something extra, outside your budget.

6. Consider debt consolidation

Debt consolidation means taking out a new loan to pay off a number of smaller debts. Multiple debts are combined into a single, larger debt, usually with more favorable pay-off terms, such as a lower interest rate or lower monthly payment or both.

Covering all your outstanding debt using a single loan for a large amount is a simple way to pay all your creditors at once with only one monthly instalment.

This is why debt consolidation is an attractive option of the over-indebted. This is ideal if you have multiple or high loan repayments, as the lump sum paid to you by a credit provider will minimize your creditors and offer a single interest rate.

However, if you don’t have your money management under control, debt consolidation may not be the answer. Unreformed irrational spenders may find it difficult to keep up with payments, or even use the consolidation loan on a new purchase. Within a short time, borrowers often find themselves buried deeper in bills because the institutions offering these loans don’t settle debts on behalf of the borrower; instead, the onus is on the borrower to make payments.

A secured loan is an alternative, where the money you borrow is secured by an asset. This poses less of a risk to the credit provider, making it easier to be approved for this loan.

7. Reward yourself

Set yourself goals and remember to celebrate – within your means – when you reach major debt reduction milestones. This will help you stay committed and motivated.