Walk the road to debt freedom – and make it last

A YEAR on from the first hard lockdown, the Transunion Consumer Pulse survey for the first quarter of 2021 offers some promising insights for South Africans: 76% of the respondents said they were optimistic about the future, and more than half felt confident their household finances would recover within the next 12 months. However, the proportion concerned about their ability to pay bills and loans had increased to 87% since December last year.

We’re not out of the woods yet, with many still facing the financial reality of the loss of household income and how it can push one into a financially precarious situation anchored by debt.

The road to debt freedom is often stressful and anxiety-provoking, but it doesn’t need to be a lonely one. With discipline, honesty and your eye on the reward – financial freedom – you can eliminate debt and enjoy peace of mind knowing the wolf is no longer at the door.

HAVE THE COURAGEOUS CONVERSATION Head-in-sand is often the default approach many people adopt when they’re unable to honour their debt repayments – it’s never easy admitting we’re in over our heads – but denial can only allow the situation to fester. What can start out as letters and calls can escalate into debt collectors approaching your loved ones or even seeking you out at your workplace.

“The biggest risk here is that they will proceed with legal action, and that only makes a bad situation worse,” says Neil Roets, chief executive of Debt Rescue. “Explaining the situation (to your creditors) and coming to a reasonable agreement will help prevent stress,” he says.

Don’t leave the conversation until it’s too late; this only allows your problem to compound, and your credit profile to take a knock. Creditors would rather know they will receive at least a portion of your repayments regularly instead of weeks or months of nothing.

“Explaining to those to whom you owe money that you can’t afford R1 000 a month because you’ve lost your job, for example, but will pay R200 a month until things improve, will act in your favour if your situation ever escalates to debt collection, because you would have made those attempts,” says Terence Tobin, an independent financial planner, money coach and owner of Rich Ideas Group.

He also strongly recommends putting this communication in writing and requesting confirmation of agreements.

PROTECT YOUR LOVED ONES No one likes to think about death, but there would be real financial consequences for those you leave behind. Inheriting unsettled debt can add to the trauma and stress your loved ones would have to deal with.

To avoid such a scenario, it is

NEWS 24/7 important to review your risk cover needs and compare these to the risk cover you already have in place, if any.

“Life cover is typically used to settle debt such as a bond on property, finance on a car, credit card debt and funeral costs,” says Sonja Linde, a Certified Financial Planner at Insync Financial Services. “If there isn’t sufficient life cover in place to settle your debt, your family could be at risk of losing their assets, including the family home.”

Although you can take out multiple policies and “earmark” the cover for different purposes, such as settling specific debts, Linde and Tobin agree that a consolidated approach could be more effective. “This makes it easier to do annual reviews, make alterations when necessary and ensure the correct amount of benefits are available for the different purposes,” says Linde.

Where a mortgage bond still needs to be settled, bond-specific cover can mitigate the risk of the bank taking cession on a portion of your life cover to settle the bond on your death.

“This way it does not impact your other personal insurance that you have in place for your family’s needs upon your death,” adds Linde.

SNOWBALL METHOD Tobin and Linde suggest the “snowball method” to eliminate your debt in a way you can manage: you start with either the highest-interest accounts or the smallest accounts that can be settled with only one or two payments, and then, as these debts are paid off, you add the money you save to paying off other ones.

If you are able to settle a debt with a single payment, ask for a possible settlement discount, suggests Roets.

Paying off debt means there is the initial discomfort of sacrificing creature comforts, but the more money you save on these, the quicker you can pay off your debt. And don’t allow your freedom to be short-lived. Sustaining it can take just as much work.

“Once an account is paid up, close it to avoid the temptation of spending on it again,” says Roets. “If it is a credit facility such as a credit card, which you might need for emergencies, avoid keeping it in your wallet.”

Make a habit of living the “cash lifestyle” by saving for items you really want, and not impulse shopping when the urge arises.

On a mental note, some self-reflection to find the source of your unhealthy relationship with money can be a valuable starting point to create long-term change, Linde says.