Do you know anyone who bought a toaster for Mother’s Day? What about a TV before the World Cup? Any excuse to go sales shopping. The shiny glossy catalogues. The interest free period. Buy now, get one free. The big red sale sticker and the “savings”. The loud music when you go in store. The wide smiles from customer service. The bright lights. All geared to make you feel giddy and excited to flash your wallet and tap that card. The name of the game is mindless consumerism. And before you know it, you’re in the red.
Debt can be a slippery slope but it doesn’t have to be a life sentence. The sooner we make a repayment plan, the sooner we lift off that debt burden. There are two methods for debt reduction, Snowball or Avalanche. Under the snowball method, starting from the smallest debt amount first, you pay one off, after the other. The psychological reward of kicking off the first debt builds momentum to go on to the next one until you’re done. The avalanche method tackles debt in terms of highest versus lowest interest rate, paying off the highest interest rate debt first and so on. This is the most effective because we get rid of the most costly debt earlier.
Let’s take Jean-Pierre who owes Rs1,500 to his cousin (no interest), Rs 15,900 on his phone (17% interest), Rs 250,000 on a car loan (11% interest) and Rs 200,000 (7% interest) on his student loan. The snowball method suggests he’d pay off his cousin first, the mobile, the student loan and finally the car loan. However, under the avalanche method, because of the differential in interest rate costs, Jean-Pierre is actually better off paying off the mobile phone first, freezing his student loan for as long as possible until he pays off the car loan and then his cousin, assuming the latter is happy to wait that long.
Avalanche or Snowball, pick either and follow these 5 debt reduction steps to get cracking on your debt free journey.
1.Face the debt head-on
Deep breath in. No more avoidance. Let’s open the bank statements, the banking app. Look for missed repayments. Set down the bills on the kitchen table. One after the other, write these down in a list. Yes, it might feel intimidating but, confronting your financial situation is far more empowering. It is the right thing to do, for you and those around you. Out in the open, you’ll often find your financial situation isn’t as insurmountable as initially thought.
2.Build a debt reduction plan
With the numbers in front of you, compare your last three payslips, deductions, repayments and the money that finally lands in your bank account. Look at the documents you have for loans to note the total amount outstanding and what costs the most in interest and repayments.
Snowball or Avalanche, come up with a plan to rank which debts you’re paying off first. While you’re there, check out the bank statements for any unnecessary expenses as trimming these will enable you to increase your repayments.
3.Speak to the bank
It’s in the bank’s best interests to help you pay off your debt on time. In certain cases such as illness, redundancy, or emergencies, some providers offer reduced or deferred repayments for a period of time. It’s also worth checking out the rates for a few different banks and finding out what alternative debt repayment options might be available to you.
It’s called customer service for a reason, you are the customer, they are here to provide a service. Pa ezite, demande.
4.Consider debt consolidation
The beauty of debt consolidation is its simplicity and cost savings. Unsecured personal loans typically have more accessible interest rates than credit cards (think 8% vs 18% per annum.) For example, Rita owes Rs 55,000 on her credit card and Rs 45,000 on hire purchase home furnishings. She combines these existing debts into one, easier-to-manage Rs 100,000 personal loan. Rita uses the funds of the new loan to pay off all the other outstanding loans. Now, instead of paying different bills at different times (each with its own interest rates and fees), Rita has only one personal loan to pay off with a fixed interest rate and a clear end date.
Search the internet for a debt consolidation calculator to see if this makes sense for you.
5.Stick to your strategy and have a debt-free party
If tackling debt feels overwhelming, pick an accountability buddy to regularly check in on you. You can and you will figure this out. A few helpful questions to nail your strategy are: Do I prefer paying back in chunks or equal payments each month? Are there automatic direct debits to make my life easier? What are my short-term and long-term debt repayment goals? How will I celebrate my milestones?
Stick this to the fridge, and then the day you get back to black, have that debt-free party!
Aila, your roadmap to a debt-free future. Remember, goals don’t need to be achieved overnight, Petit à petit, l’oiseau fait son nid. Good luck!
“Ketvi, lot fwa la kan ou koz komisyon, ou pan mansionn gambling ki bokou morisyen abitie dan zot way of life. Kot sa tonbe dan ou bidze? Vishnu, 60 an.
Vishnu, an verite saken so priorite, saken so bidze. Personelma pou moi gambling enn want pa enn need. Si ena dimoun pou sap lor kal si pa al lekours enn fwa par mwa, tank ena manze lor latab, pouvi ena enn limit avan sorti al zwe. Sak soz an moderasyon ki ou dir?
Send your money questions to anoukozkass@gmail.com or @mauritiusmoneyandme.
Disclaimer – Information in this column is general in nature and does not take into consideration your personal financial situation. It is for educational purposes only and does not constitute financial advice. Before making financial decisions, consider seeking independent financial advice tailored to your individual needs.