Debt is like a fire. If it’s small and controlled, it can be useful. But if you ignore it for even just a moment, it can easily turn into an uncontrollable and destructive force. And when that happens, it becomes an obstacle you face all day, every day: it stops you from saving and amassing wealth, and it stops you from enjoying life. Once in this position, some people never get out. They take loans to cover loans, and the interest on those loans starts to snowball.

But you don’t have to let debt consume you. Getting out of the red is hard, but it can be done. Here, we explain how you can regain control of your finances in 5 simple steps:

1) Commit to a debt-free way of life

To get out of debt, you have to take drastic measures, and you have to accept that life will be hard for a while. You’ll have to practice a great deal of self discipline to follow through with your plan. Acknowledge that now. No more parties, and no more excuses - “It was only a small loan, and I really needed a new TV.” Getting out of debt requires, above all else, concentrated will power.

2) Create a budget & start saving

The next step to getting out of debt is to draw up a budget. Here, you will have to be realistic about your expectations.

Prioritize expenses & cut out what you don’t need

You don’t need DSTV and you definitely don’t need that gym membership if you’ve only used it once in the last month. Be ruthless here. Your budget is a fat guy, and you want to make him skinny. Consider your real needs, not keeping up appearances. By now you should be above that.

Create a budget

Once you have a list of all essential expenses, put them into one of five categories - rent, debit orders, groceries, transport, and utilities. Your rent and debit orders should be the same every month, but you should track spending on the three other categories to ensure that you don’t overspend.

Stretch your new budget

Once you start to cut costs, you’ll be surprised by how far you can stretch your budget. Be on constant lookout for deals on groceries, and buy in bulk. If you don’t have a low-cost bank account by now, you should get one. Any money saved on banking and groceries (or any other category) will allow you to pay off your debt faster.

3) Create an emergency fund

An emergency fund is essential to staying debt free. If you don’t have this rainy day fund when you need it, you’ll have to rely on a loan for those unexpected emergencies - burst geysers, vehicle repairs, sick kids and the like. So, how much of a buffer do you need between yourself and these mishaps?

That depends on several things, including the number of dependents in your care, the condition and value of your car (if you have one), and the limits of your medical aid (again, if you have one). Create a list of things that could go wrong and then budget for the worst of them.

4) Improve your credit score

Your credit score doesn’t only affect your interest rate when you apply for a loan; it could also affect your existing interest rate. Lenders regularly review their customers’ risk levels to determine what kind of interest they should be charged, and if you don’t want to pay more than you need to, you should do what you can to improve your credit score.

Fortunately, there are a few things you can do to lower your risk level:

  • Pay on time and don’t miss payments
  • Get off the blacklist (if you’re on it)
  • Spend responsibly

To better understand how these measures can help you improve your credit score, read our blog How to improve your credit score or, for a broader understanding of credit scores, read Credit scores: everything you need to know.

5) Consider consolidating your debt

A debt consolidation loan is a financial product that can help people with uncontrollable debt get out of the red and reduce the cost of their debt. These products can lower the cost of debt by allowing someone to replace several smaller debts they have with a larger single loan at a lower interest rate. To learn about the other ways that a consolidation loan can help you pay off your debt, read our article When to take out a debt consolidation loan.

At Old Mutual we offer debt consolidation loans to help our customers cut costs, save money, and get out of debt faster. With lower interest rates and flexible loan terms and amounts, our debt consolidation loans offer clients a strategic and affordable way to eliminate their debt.

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