I have been meaning to write up a step by step guide to financial freedom for a while now. The internet is littered many such guides, but mine is a my own personal journey, that I am travelling and learning as I go along. I have renewed motivation because a friend of mine is taking a journey I personally took just over 3 years ago. The treacherous trip of killing debt and stay out of debt. So today I just want to share my notes and methods I used along the route.
Killing debt is the very first step to attaining financial freedom. If you dream of becoming wealthy one day, this should be your very first step. Doing anything else before you complete this step is counter-productive, there isn’t any investment that can give you better returns than the interest you pay on a loan, except perhaps MMM.
To kill all my debt, I used a method called snowballing. I just found out that there’s a sexual practice with the same name, I will not get into details, let’s stick to the context shall we. Debt snowballing is basically applied when you have more than 1 account owing, and you pay off the smallest account first, while paying only the minimum required amount of the other accounts, until the first one is completely cleared, then you move on to the next, and so forth and stuff like that.
This is not the most efficient method, but it will do wonders in boosting your moral, because, in just a few months, you’ll have paid off your first account. The most efficient method is a variation of snowballing called the avalanche. Works similar to snowballing, except you pay the account with the highest interest rate first.
For this method to work, you need to be willing to pay a little bit extra over and above your minimum. Now that’s where the challenge lies, where do you get that extra money if you are already squeezed? Cut down on some luxuries. Don’t get that new Iphone, drop you dstv to compact, shop around for new insurance, trade your gym membership for running, reduce the booze, etc.
Before you start, cut up all the cards, toss them into the bin, do it today, now. That’s step number 0.
Let’s do an exammple:
Edgars, balance: R2500, minimum payment: R150
Woolies, balance: R5000, minimum payment: R300
Capitec personal loan, balance: R15000, minimum payment: R750
Discovery credit card, balance: R25000, minimum payment: R1500
Wesbank Polo Vivo, balance: R109000, minimum payment: R3400
Total time to pay off normally: at least 72 months (guess how many month using snowball)
Interest paid: Over R30000
Snowball: R700 (This is the money you managed to save by cancelling dstv premium and you will add it on to your debt killing strategy)
Month1: Edgars: R150+R700=R850, the rest pay just the minimum, to avoid the stress of those dreadful calls when you miss a payment.
Month5: Edgars is paid off. Buy yourself a bottle of R50 wine, not 4 cousins ne (with money you have been saving for not boozing up so much, don’t touch the snowball budget)
Woolies: R850+R300=R1150, the rest pay minimum.
Month8: Woolies is done. Call them, oh, and Edgars too, and inform them that you will not be needing the accounts anymore. They might try some funny tactics to keep you on their leash, or ask you to bring your paternal great grand mother’s proof of residince, just do it, get Khumbulekhaya, SpeakOut, Utatakho all involved if you have to. Buy another bottle of wine, not 4th street please, you deserve better.
Capitec: R1150+750=R1900, the rest, you know the drill by now.
Tip: On the credit card, call Discovery every month, and ask them to reduce your credit limit, by at least R1000. Do it. It helps to remove all temptations.
Tip: If you get a salary increase, also increase your snowball amount. If you get a bonus, drop some of it into one of the accounts, these additional amounts are called snowflakes, they make a great difference.
Month14: Capitec is done and dusted. By now your should be able to sleep through an earthquake, killing debt does wonders to the quality of your sleep. And now you are no longer avoiding private calls, it may well be a recruiter for a potential new job. But if it’s VW trying to sell you the new polo max with heated automatic panoramic sunroof, tell them in the most diplomatic manner to <insert your favorite word here>. My favorite word is ‘gtfo’.
Discovery R1900+R1500=R3400, and the minimum to remaining account.
Tip: Use an app called 22seven, connect all your accounts, and watch your networth moving from negative, towards zero.
Month17: Credit card is down, buy yourself a bottle bottle of champagne. Not Jc le Roux ne! But not Moët at Taboo.
Call Discovery, order a new card (remember you cut up the old), reduce the credit limit to the bare minimum, something that you can always pay off in 1 month, without a sweat. Credit cards, when used carefully can give you great rewards. But if you don’t want anything to do with credit ever, it’s absolutely ok to close the account too.
Month27: Wow, well done, now you can take a picture with your car at a dealership, after you have done a maintenance service, ask them to borrow you that big ribbon, and caption the picture with “Look at God”. Don’t forget to call Wesbank to send you the necessary documents so that you can finally take ownership of your car. At this point you will feel like you can actually afford the Golf R, don’t do it. Take a holiday rather, and then stay tuned for the next step in the path to financial independence.
Tip: If you have a bond, consider putting it on as your last account on the snowball, I know the amount is staggering, but just do it. Paying off a house over 20 year period is criminal on the part of banks, and stupid tax on any one who does it.
Time to pay: 27 Months
Interest savings: over R5000 in interest saved.
Just to brag a little bit, I’m completely debt free, and for the first time since I bought my first car back in 2007, I have a positive net-worth. It is the greatest feeling ever, and if anything, makes you sleep very well.
Come on, take out your calculator, add up the value of all your assets, then subtract all the money that you owe to banks and retail outlets. If the number is negative, start today, and reduce that deficit, until you get to zero.
Here’s a link the spreadsheet I used in the example: