The pandemic has disrupted several streams of income for many people. This type of financial distress can lead to an increasing dependency on debt and credit facilities.
What’s the difference between debt and credit?
Credit is the ability to borrow money while debt is the result of borrowing money and represents how much you owe another person.
Both credit and debt can play a useful role in financial planning when used appropriately and for the right reasons. But a lack of discipline and incorrect or unnecessary use of credit can quickly spiral into uncontrollable debt.
Possible reasons for debt
The reason you’re in debt may help you figure out how to get out of it. This could include:
Mismanagement of finances: You’ve simply spent more, or taken on more credit, than you can afford. Whether this is to fund an excessive lifestyle or because you’re a big spender it doesn’t matter. Mismanagement of your finances will likely lead to a reliance on debt or credit,
Loss of Income: If you’ve been retrenched or had to close your own business, you may turn to debt as a substitute to maintain your lifestyle or meet your financial obligations.
Unexpected medical expenses: Incurring an unexpected medical expense that isn’t covered by your medical aid may negatively impact your finances.
Seven strategies to reduce debt
Here are a few strategies that can help reduce your debt burden. They require financial discipline to be effective and it can be helpful to engage a financial adviser to ensure you come up with the plan most suited to your individual circumstances.
- Use surplus money: If possible to pay off your mortgage with any excess money you may have.
- Prioritise high interest rate debt: Concentrate on the debt with the highest interest rates first. You’ll buy yourself some breathing space by paying this off first; the lower interest rate debt will be less onerous on your finances.
- Debt consolidation: Combine smaller loans into a larger loan with one interest rate to lower monthly repayments.
- Draw a budget: Plan your spending as much as possible so you can avoid unnecessary spending. Be realistic as to how much you can reasonably save and spend.
- Emergency fund: Improve financial security by making provision for liquid assets such as cash that can be used to meet emergency expenses.
- Sell non-essential assets: The proceeds of these can be used to pay off debts
- Liquidate Investments: In certain situations, it may be necessary so liquidate your investments so as to pay off debts
The suitability of each strategy will vary from individual to individual and will depend on personal circumstances. A financial adviser or wealth manager will be able to help you tailor the above list to your own needs.
