How To Pay Off Your Debt Quicker
A few years ago, I found myself stuck in debt. It seemed like a never-ending downward spiral. I had a revolving credit facility that I used in full. I was paying two car instalments. I was involved in a crash a few months earlier and my car had to go for repairs. My car insurance did not cover a hired car. I struggled for a month hoping to get my car back from the panel beater.
A month turned into three months of waiting. I decided to buy another car on vehicle finance as I could not wait any longer. In addition, I had furniture and clothing store accounts that I owed a few thousand rands. I was paying the bare minimum required by the bank and creditors. It seemed impossible to get out of my financial woes.
Know Your Debt Structure
I decided to stop using my revolving credit account. It was the toughest of all my debts. The bank would debit my account with a monthly premium on payday and I would be back using the facility a week later to cover some of my expenses such as fuel and groceries. I had never bothered to read my account statements and had no clue how much I owed for each and the total. I did not bother to find out how long it was going to take to pay off these accounts.
So, I was literally stuck and lost. I had no clue where my money was going or what I was paying for. I would not be able to know how much I owed and how long it would take to pay off the debt if I did not know how much I owed. Peter Drucker said “You cannot manage what you cannot measure”.
I was living from one pay cheque to another.
One day I decided to analyse my account statements to find out how much I still owed for each account. That was when I learnt that in paying off debt, there is a whole lot of other costs that one must pay. These include different fees and loan insurances. Upon discovering the huge amounts of money that I was paying in bank fees, interest and loan insurance versus the principal debt portion I took it upon myself to do something about my finances.
By going through all my account statements, for the first time I was able to work out how much money I owed in total for all my debts. I was then able to have a holistic picture of my financial situation. I could tell which debt I owed the most money and which had the biggest dent on my finances.
Develop a Debt Repayment Plan
I immediately identified that the revolving credit facility was the biggest culprit and was doing the most damage on my finances. I decided to tackle it first. I had to find ways and means to pay off the revolving credit facility faster. So, I had to find money to pay on top of my monthly instalments. Secondly, I had to stop using it for my expenses so I could rapidly reduce my outstanding balance.
I freed up some money by cutting down on some expenses. I also negotiated with my some of my creditors to reduce my instalments. By doing this I was able to put aside a significant amount of money when I received my pay cheque. I channelled all these new savings towards paying off my revolving credit facility. I was able to pay off and close this account within a few months.
Snowball vs Avalanche Method
I felt a great deal of relief and sense of achievement when I finally closed my revolving credit account. I was highly motivated to tackle all my other debts using a similar approach. I then tackled smaller debts i.e. my furniture and clothing store accounts. My revolving credit instalments together with my new savings resulting from reduced expenses and rearranged payments was quite a hefty amount worth a few thousands. I was able to use these savings to close all my store accounts within a few months.
All the freed-up money from closed accounts constituted quite a significant amount in excess of my vehicle finance instalments. I immediately channelled this excess money to paying off one of my vehicle loan accounts. I was paying three to four times more than the required minimum instalment per month. I was able to pay of both my car loans within a very short period of time. I was able to pay off vehicle finance on my newer car nearly 3 years ahead of schedule. I saved thousands of rands in interest and bank fees by paying off my debt quicker. My approach in paying off my debt was to use a combination of avalanche and snowball methods.
I started with a revolving credit account which attracted the highest interest rate and bank fees – this is the avalanche method. For me the revolving credit account was my worst nightmare. So, I wanted to get rid of it first to feel better and in control. Closing it motivated me to pay off other debts and restored my self-confidence. Then I tackled the smaller debts which annoyed me a lot and which I perceived as quick wins – this represents the snowball method. For me it is the psychological boost that paying off debt gives me. So, I tackled first those debts that kept me awake at night.
Living Debt Free, Frugal and Investing
I was debt free after paying off all my debts and for the first time I felt in control of my finances. I learnt a few money lessons that will stay with me forever. I am now using these lessons to pursue my financial freedom goals and accumulation of wealth. My focus is now on controlling my expenses, minimalism and investing. Now with excess money that constitutes more than half of my income at every pay cheque, I decided to find a more secure and high growth investment vehicle. I bought a few rental units for investment.
These properties are nearly paying for themselves from the rental income. In the first year I subsidized these properties by a small fraction to cover additional expenses such as bond insurance, levies and taxes. The rental income will increase at the end of every lease agreement and thus should be able to cover all expenses including the mortgage bond in full within a year. Rental property gives you opportunity to earn passive income in the form of rental income and capital growth from the appreciation of the asset. This is a sure way to set you on your path of financial independence and to retire early.
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