When it comes to paying off debt there are multiple ways in which to do so. The Debt Avalanche method focuses on paying off the highest interest-bearing debt first. This method is the cheapest way to get rid of debt because it prevents your higher interest-bearing loans, accounts etc. from accruing even more debt.
If you want to start the journey towards becoming debt-free, we have created a 5-step guide focused on the Debt Avalanche method to help you on your way.
Step 1: Determine & prioritise your debt
The first step is to determine the total amounts of everything you owe. Indicate what the interest rate and minimum repayment for each is. Now, prioritise each of these totals according to the debt that carry the highest interest rates.
Step 2: Change your debt behaviour
You have to change your debt behaviour and refrain from making new debt. To do this you have to apply your mind and adapt your behaviour accordingly. Do whatever you need to do to ensure this i.e. cut up your credit cards, stop going to the mall, place all your store cards in the safe, etc.
Step 3: Create a strict budget
Revisit your budget and see where you can cut costs. If you want to become debt-free you will need to make tough decisions now. Cut on all luxuries and allocate a monthly lump sum that you will be able to use on repaying your debt going forward.
Remember: Your budget should always include funding for emergency / unforeseen circumstances. It could be an amount you leave in your account at all times or an amount you add to a specific savings account for this purpose. This is essential in helping you become debt-free because you won’t have to make new debt to pay for that new car wheel for example.
Tip: If you do not have a budget, use our budget guide to create a budget before continuing to Step 4.
Step 4: Create a debt repayment plan: Debt Avalanche Method
Now that you have worked out an affordable budget, take your list created in Step 1 and work out a separate debt repayment plan. This plan will focus on paying off balances with the highest interest first.
1. Credit Card (22%): R20 000 (Minimum repayment +/-R1 700)
2. Clothing Account (12%): R10 000 (Minimum repayment +/- R950)
3. Student loan (6%): R35 000 (Minimum repayment +/- R680)
And in Step 3 Jim managed to allocate R5 000 to repaying debt every month. His debt plan could look like this:
1. Credit Card (22%): R20 000 (Minimum repayment +/-R1 700)
Repay = R3 400
2. Clothing Account (12%): R10 000 (Minimum repayment +/- R700)
Repay = R850
3. Student loan (6%): R35 000 (Minimum repayment +/- R680)
Repay = R750
This way Jim is paying double on his highest interest-bearing debt and slightly more than the minimum on the others.
In several months he will be able to pay off his Credit Card debt, leaving an extra R3 400 to use on his next highest interest-bearing debt, until all his debt is paid off.
Step 5: Be resourceful
If you are serious about becoming debt-free, you must think of ways to earn more money and pay this money into your highest interest-bearing debt. Any money that comes your way needs to go there too.
Ways in which to do this:
Use your annual SARS refund to pay off debt.
Clean out any savings you have and pay off debt.
Are you eligible for an increase at work? Use the extra money you get out each month and pay off debt.
Put in overtime at work or take on freelance jobs and pay all earnings on your debt.
Sell items you do not use and pay off debt.
If you are struggling to create an affordable debt repayment plan, don’t be alarmed. You do not have to take on your debt on your own. Debt Rescue can help you on your journey to becoming debt-free through debt counselling in terms of the National Credit Act.
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