PPS Cognition 3 - Page 14

WHERE TO START WHEN MANAGING YOUR DEBT I t’s important that consumers learn how to manage debt in a balanced way and use credit in an intelligent way. If your month- ly food, rent, petrol and other essential living costs come to about 30% of your income then make that the limit on your credit card. This will enable you to pay off your card monthly. Whatever your financial situation, you should consider lowering your standard of living rather than increase debt levels. The rule that I follow is that if I can’t pay for it in cash, then I probably can’t afford it. Remember, also, that it’s important to With the snowball method: You first pay the minimum monthly payment on all your debts. Then you devote any leftover money to the debt with the smallest balance. Once that debt is paid off, you devote the previous monthly payment and any leftover money to your next-smallest debt. build your emergency fund, so once you’ve paid your insurance, home loan and car, save whatever is left in an easily accessible savings account. When deciding how to pay off your debt, there are two basic methods of debt payment, namely the Debt Avalanche method versus the Debt Snowball method. The best method to select depends entirely on your own personal financial situation and circumstance. When using the debt avalanche method, you pay off debts with the highest interest rate charges first and not those with the biggest balances. WHICH METHOD WOULD YOU USE TO TACKLE DEBT? Many South Africans combat the high cost of living by taking out loans or using credit facilities to cover their exorbitant lifestyles. This results in added financial pressure as using debt to cover costs comes with high interest rates. Missing a month of payments adds more interest and puts you under further pressure. Debt becomes a problem when your monthly instalments are close to or exceed your disposable income. If you need help in cutting debt, your PPS financial adviser will give you the guidance you need. PREVIOUS PPS | COGNITION | EDITION 3 | MAXIMISING your finance for today Your creditors may also raise interest rates if you get behind on debt payments and this will reflect on your credit score. Eventually your assets may be seized, and you could end up on the street! Rate this Article Willie Esterhuizen PPS Financial Adviser 14 15 NEXT PPS | COGNITION | EDITION 3 | MAXIMISING your finance for today