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How to create a debt repayment plan

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By paying off your debt in chunks you can quickly become debt-free. Picture: iStock
By paying off your debt in chunks you can quickly become debt-free. Picture: iStock

When it comes to paying off debt, most of us just feel overwhelmed – we think that a lump sum that will settle our debt in one go is the only solution. Yet, as our Money Makeover candidates have already shown, what you really need is a plan and some discipline. You don’t have to tackle all your debts at once – put a dominoes strategy in place and knock them over one by one.

READ: How to avoid a debt spiral 

In this example we show you how to use R1 000 to pay off R50 000 in just 18 months.

Let’s assume you have multiple credit facilities and owe a total of R50 000:

• Retail store account R3 000, current repayment R300 a month;

• Clothing account R7 000, current repayment R500 a month;

• Personal loan owing R10 000, current repayment R650;

• Bank credit card R30 000, current repayment R2 500 a month.

Rather than trying to incrementally increase the repayment amount on each loan, target the smallest debt first by increasing that payment by R1 000. If you can settle one debt quickly it will give you the motivation to keep going and it will free up more cash to target the next debt.

January: Increase the retail store repayment by R1 000 to R1 300. Paid off by March 2018.

April: Take the R1 300 you used for the retail store account and add to the clothing account to increase repayments to R1 800. Paid off by July 2018.

August: Take the R1 800 from the clothing account and increase your personal loan repayments to R2 450. Paid off by November 2018.

December: Take the R2 450 from your personal loan repayments and hit that credit card with R4 950 a month. Paid off by June 2019.

So you have just paid off R50 000 worth of debt with just R1 000 out of your budget in 18 months. If you receive a company bonus or some extra cash, you can pay the debt even faster.

Remember this only works if you close down the credit facilities as you pay them off, otherwise you will just go back into debt. You also need to follow a dual strategy of building up an emergency fund so you have some savings for emergencies that stop you from taking out credit again for unexpected events.

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