Save effectively to keep you debt-free
In an over-indebted country such as South Africa, learning how to save effectively can be just the secret weapon you need to stay out of debt. Yes; it is challenging having to choose between saving for an emergency and paying off debt, but it is important that you do both.
When you have high-interest consumer debt, paying it off first can help you solve ongoing problems with managing and saving your money. To many South Africans, a debt-free life seems like a dream, not a reality. But, it can be done with just the right level of commitment and discipline.
It is important that one commits to a strong purpose and goal behind saving and getting out of debt, lest one falters back. When you identify goals that motivate you, it becomes easier to put aside a few hundred Rands toward eliminating high-interest debt and saving every month.
The faster you pay off your balances, the sooner you can enjoy other pleasures in life without the stress of managing debt.
Balancing Savings and Debt Repayment
When considering debt repayment versus saving, what matters most is analysing the “opportunity cost” of debt repayment vs saving. An opportunity cost is the benefit or the loss that could have been enjoyed if a different choice was made.
If you don’t have any savings, focusing solely on paying debt can backfire when unexpected needs or costs come up, and you can find yourself borrowing again and ultimately trapped in a revolving door of debt.
There are two important factors you should be considering:
◉ The benefits you are giving up by not saving or investing
◉ The debt interest rate you’d incur if you choose to save over paying off debt.
For example; if you can earn 8% annually on your savings or investment, but your credit debt is accruing at 17% annually, then paying down the credit card faster is a better option since the debt will be growing faster than the interests on your savings or investments.
Tip - if you have high-interest debts, allocating more towards the debt repayment over saving can help you avoid additional interest, penalties or other negative consequences (like a lower credit score); allowing you to save even more in a reduced period of time.
If paying off debt is your number one priority, it helps to identify what your financial goals are, so you can prioritise them in your budget. By accounting for a monthly repayment in your budget, it will better ensure that you still have money left over for necessities.
Prioritising debt repayment
To get started with repaying your debt, here are four things to take a look at:
- Calculate your expendable income (what’s left after taxes, bills and food)
- List all your regular expenses (even if they’re periodic) and see if there’s anything you can eliminate
- Create a budget based on that number and include paying off debt as a significant part of the equation
- Target the debt with the highest interest rate and pay as much as possible towards it
The secret is in knowing where, when, and how to allocate the funds. Make sure you are educating yourself regarding your own personal finances, know where the money is going, where it’s being wasted, and how you can avoid this.
What are the 3 reasons to save money?
Saving your money is important when you want to become debt-free and more importantly, to stay debt-free.
Think about this; you go to the doctor and he says you need an emergency operation, but you don’t have any money to pay for the operation. In this situation, the only thing you can do is take out a loan to pay off your operation.
The top 3 reasons to save money are:
- Staying out of debt.
- Instead of taking out a loan to cover unexpected expenses, you can use your savings to cover it.
- Using your savings for luxury or items you want that cost money.
- Saving towards a down payment for your home or your car.
In an ideal environment, having a culture of saving can prevent unnecessary debts, contribute to increased investments that in turn helps to grow the economy, increase incomes and ultimately increases savings further.
Where to start the journey to a debt-free life
The best way to start your journey towards financial freedom is to evaluate what position you are in. Ask yourself the following questions :
- How much debt do I have?
- How much am I left with after paying for necessities?
- How much money do I have saved up to get me out of a tough situation?
- Where can I cut down on costs every month?
- What are my debt interests?
- Can I negotiate a lower interest rate or settlement amount?
- How much can I afford to pay?
Once you have answered these questions you will also have to ask yourself if you are over-indebted, this means you are spending more than you earn to pay off your debts.
If you are over-indebted, Meerkat can help!
Contact us today to reduce your debt repayments by up to 50%, this will allow you to have enough money each month to pay all of your debt and have some leftover to cover living expenses, maybe even start saving.
Start saving
Now you know why saving your money is so important and how it can benefit you in the long run.
Meerkats new saving solution allows you to start saving from as little as R25 a month, with no contract or fees. Our customer portal lets you stop and start saving your money all with the click of a button. The best part is, this can all be done via your cell phone which means no more standing queues!
The idea of saving might seem impossible but even if you start saving R25/R50 a month, your savings will build up and over time you will end up with a good emergency fund. By having this emergency fund, you can have peace of mind knowing that if something unexpected happens, you can afford to pay for it without getting deeper into debt.
South African consumer debt
South African consumer debt is estimated to be around 1.7 Trillion Rands, almost as high as the government’s debt level, which is estimated at about R2 trillion.
There are many factors that greatly contribute to South Africa’s savings culture, from poverty, poor financial literacy, “black tax”, inflation, and so much more; but the importance of saving cannot be overstated; especially for a developing economy like South Africa.
With this said; it is ever more important to distinguish between poor saving as a result of a lack of means and as a result poor savings habits
The journey to a debt-free life takes dedication and hard work but over time it gets easier and easier and before you know it, you’ll be debt-free and in a good financial position.