Which debts should you really pay off first?

You lose financial ground by paying interest on your debts every month, so it’s best to get out of debt as quickly as possible. There are different schools of thought when it comes to which debts you should pay off first, however.

We examine what these different approaches are, which might suit you best, and what strategies you should follow to manage debt in future.

Tip: If you’re not meeting your debt obligations, consider debt consolidation.

Debt is a personal issue

According to financial planner Sylvia Walker, the author of Smartwoman: How to Gain Financial Independence and Create Wealth, there is no right or wrong approach.

“Debt is personal, and it needs to be tackled according to your circumstances,” she asserts. “Most importantly, don’t be embarrassed if you’re in debt – and reach out if you need help.”

Adele Barnard, senior financial planner and investment specialist at Sanlam, says people frequently feel overwhelmed, and don’t know which method to use to pay off their debt. “They also don’t know how much their debt is actually costing them,” she points out.

Avalanche versus snowball approach

You may have heard about the “avalanche” and “snowball” approaches to debt resolution.

With the avalanche method, you make the minimum repayment on each debt, then use any extra money at month-end to pay into the debt that carries the highest interest rate.

“Mathematically, this approach makes the most sense,” Barnard says. “For example, for every R100 you owe, at an interest rate of 24%, you pay R24 per month interest, which is a lot.”

Walker notes that the solution is circumstance-dependant. “This can work if you have extra cash,” she says. “However, most people only realise they have a problem with debt when they can’t service it. They may not have anything extra to put in.”

The snowball method involves paying off your debts from smallest to largest. “This makes psychological sense as it keeps you motivated – you can see progress and it feels like you’re winning,” Barnard says.

Walker does not recommend paying off multiple debts at once, though, because it’s easy to feel deprived. “Remember, you can’t incur further debt on an account you’re already paying off – so taking baby steps is fine,” she says.

Examine why you’ve incurred short-term debt

Walker suggests consumers start by servicing short-term debt incurred on consumables, like food, clothing or homeware.

“These are the easiest debts to kill as they are short-term accounts – six to 12 months – and interest rates are high as this is unsecured debt,” she says.

It’s useful to know why you incurred debt in the first place, which might help you to avoid falling into the same trap in future.

“Nobody should need to buy food on credit. If you’re using your credit card to pay for groceries, you’re overindebted,” Walker warns. “If there’s not enough money coming in to cover family expenses – which is a cash-flow issue – consider downsizing and cutting back, or think of ways to generate extra income.”

Tips for paying debt off quickly

Walker and Barnard offer the following tips for consumers who want to pay their debt off quickly.

• Examine your bank statements to see where your money goes. Identify ways to cut certain expenses and use those funds to pay off debt.
• Pay your bills on time, so as not to accrue additional interest and fees.
• Pay more than the minimum – even R100 extra a month can reduce your interest and repayment amount.
• Tackle small debts first – small wins lead to greater things.
• Sell items you no longer need and use this cash to settle debts.
• Reward yourself when you’ve paid off debt. Yes, you can treat yourself to a manicure, a new book, or a visit to the nursery – but pay cash!
• Don’t incur further debt. “If you have a store card, pay off the balance over 6 or 12 months and stop spending on the card,” Walker recommends. “Cut it up and commit to using cash when you need to shop again.”

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