Understanding Debt situation using a 4-Step Debt Approach

 

Statistics show that most Africans are heavily in consumer debt due to the choices they make in their day to day lives which lead to lifestyle inflation. I have designed this 4- step Debt Approach which can help individuals to understand why they are in debt and how they can work towards settling it.

Step 1 – What happened?

It’s important to ask yourself “What happened first that led me in debt.” If this question is not answered you are bound to repeat the same mistakes. Ask yourself if it was an emergency, an investment decision, a lifestyle decision or any other circumstance that led you into debt. Understanding the root cause will assist in providing answers on the best plan to repay and avoid debt in the future.

Step 2 – Why did it happen?

The next step is now understanding why you resorted into getting a loan. Was it because you didn’t have an emergency fund or they were no savings at all to begin with? Why is it every time you end up borrowing money to cover your day-to-day expenses. Is it because your income doesn’t cover your basic expenses or you are living a life that you can’t afford? Understanding the “Why” part can assist you in understanding your relationship with money leading you to start working on better habits which result in financial freedom.

Step 3 – How can I pay off the debt?

Once you have addressed the questions “Why and what happened?” you need to understand what you are going to do to start paying off the debt. Listing down all the debt you have will give you a debt status report. Your debt status report is brilliant if it lists the amounts, the repayment period stating specific repayment dates and the interest. After this exercise organize the loan amounts starting with the highest interest down to the lowest interest loan. Paying off the higher interest will be sensible as the interest charges will be taking more money from your pocket. This does not mean that you have to leave the other debts unpaid. You can plan to pay the minimum instalments on the low interest loans. Once you pay off the high interest one move on to the next till you complete your payments.

Step 4 – How do I prevent incurring new debt?

When you are paying off the debt you need to be disciplined about not borrowing again. This is a very difficult process because it requires you to make lifestyle adjustments until you pay off the debt. This is just a small sacrifice with long term returns such as freeing up tied up money. When you have cleared off your debt you need to review your lifestyle adjustments with caution so that you do not end up in the situations that got you in debt initially.

Let’s strive to live a debt free life!!

By Tarie Manyonga

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