Slow but sure way to get yourself out of debt

DEBT is like deceit: a relatively minor transgression can trigger a series of increasingly serious transgressions, each to cover up the previous one, until the situation is worse than anything you could have imagined. Just ask Marcus Jooste.

Or take the following conversation as an example:

You (arriving home after 8pm): Sorry dear, I had to work late. (Carefully prepared lie no. 1.)

Wife: But I called your office, and they said you’d left at five. By the way, your cellphone was on voicemail.

You: I… um… went out to meet a client at the client’s office. (Hastily conceived lie no. 2.)

Wife: Your breath smells of beer. Did you go out drinking with the boys?

You: No, no… I just had one beer. The client offered me one while we were discussing a marketing plan. (Completely unconvincing lie no. 3.)

Wife: I don’t believe you. What’s this client’s name, then?

You: Ummm…

With debt, the scenario might look something like this:

Transgression no. 1: You don’t pay off the full amount on your credit card because you have to settle an exorbitant dentist’s bill that the (insert expletive here) medical aid wouldn’t cover.

Transgression no. 2 ( some months later): You miss a payment on your car because the debt on your credit card has climbed to the point where it’s a struggle even to make the minimum payment, let alone pay the full amount.

Transgression no. 3 (another few months later): You take out a personal loan at a prohibitively high interest rate to get your arrear car payments up to date, after some threatening letters from the vehicle finance company.

Deeper and deeper…

In each scenario, there’s only one respectable way to break the spiral, and the sooner you do it, the easier it is: swallow your pride, own up to your mistakes or misdemeanours, and make amends.

A few weeks ago, my column about buying cornflakes on credit elicited a number of responses from debt-burdened readers, with one of them asking for advice on escaping the debt trap.

Over the years Personal Finance has covered this topic extensively, so it is with past articles in mind, cobbled with a good dose of common sense, that I offer the following get-out-of-debt plan:

• Swallow your pride and admit you are in trouble. This is the hardest step. Explain to your loved ones you are having financial difficulties. Reassure them it’ll all turn out all right, as long as everyone gets used to consuming less and trying to live more frugally.

Granted, you may battle explaining to your eight-year-old son that the remote-controlled robotic Darth Vader he wants so badly is out of the question, and that he’ll have to get by with fewer such toys than his best friend Alexander, whose daddy is a lawyer. (But if you love them, you’ll do it, because the alternative is much worse.)

• Determine the depth of the (insert expletive here) you’re in. You need to figure out whether, with a determined effort, you can climb out of the hole yourself, or whether you are in so deep that you need the help of a debt counsellor. If such a large portion of your income is going towards servicing debt that you don’t have enough for the basics, such as food and transport, you probably cannot do it alone. I’ll cover debt counselling in a future column.

• Do your homework. Going back over a few months, make a detailed list of your income and expenses for each month, grouping your expenses into debt repayments, essential expenses, and non-essential expenses. By the way, DStv is a non-essential: you can go without watching the World Cup in the comfort of your home; you can’t go without a roof over your head.

• Draw up a frugal-living budget. You can’t be spending more than you are earning, so first cut back on the non-essentials until expenses equal income. Then you need to cut some more – even a saving of R500 a month will help. Oh, and there’s something else to cut, using a sharp pair of scissors: your store cards and credit cards. You’re allowed to keep your bank debit card.

• Stick to your budget, with your family’s support. If you all buy in (perhaps not an apt term in the circumstances) to the idea, you are more likely to succeed. And make a positive of your efforts: “Look how much we’re saving by eating out only once a week”, or “Our family prides itself on wasting as little as possible and recycling where we can – it’s our contribution to the environment.”

• Now tackle the debt. Put the R500 (or more) you’re saving into paying off the smallest debt with a high interest rate. This is likely to be a store account, a credit card account, or a personal loan. It may take several months to pay off the account, which we’ll call account A. Once you’ve finished paying off A, take the whole amount you were paying on A (the regular repayment plus the R500), and add it to your regular repayments on account B, another account with a high interest rate. When B is paid off, you will have an even larger amount to pay off account C: in addition to the regular payment on C, you add the R500 plus what would have been your regular payments on A and B. Get it? On each successive account the amount you have available will be more than on the previous one. So you’re turning the vicious cycle into a virtuous one.

Once you’re at a debt level you can live with (the remaining debts should be only the long-term, low interest ones such as vehicle loans and your home loan, and realistically their combined repayments shouldn’t be more than a third of your income), you can switch to a “maintenance diet”, by still trying to be as frugal as possible while indulging yourself and your family now and again.

At this stage you might even begin something that you never thought possible: investing.

martin.hesse@inl.co.za