With inflation and higher interest rates coming off record lows, it makes sense to see if you can reduce your debt. If you manage to do so, you’ll save yourself from increases in your monthly payments as interest rates creep back up.
Inflation is climbing around the globe as demand for commodities like oil have risen since the beginning of 2021. The same is happening in South Africa, and the SA Reserve Bank has already indicated that interest rates will be 0,5% higher by the end of the year.
A way that you might be able to settle some debt quickly is if you receive a salary bonus, or you come into some money. It’s always tempting to spoil yourself if you suddenly have money you weren’t expecting. Paying off your credit card hardly seems like a satisfying way to use your money, but you’ll thank yourself in future for doing so.
Consider the maths
Say you have debt of R10,000 on your credit card, and the bonus money allows you to settle that in a single payment.
An emergency fund makes great financial sense, so that unexpected expenses don’t become a crisis
With a credit card balance of R10,000, the minimum monthly instalment of 5% initially will be approximately R500. If the bonus money allows you to settle the credit card debt in full, that R500 may be contributed to a savings account.
If you paid only the minimum amount, it would take you years to settle the credit card debt, and you’d pay interest at an annual rate, compounded monthly. So, by using your bonus to settle your full credit card balance, you’re immediately saving yourself all the interest you won’t be paying.
Put that money to good use
An emergency fund makes great financial sense, so that unexpected expenses don’t become a crisis. While a monthly R500 may seem like a modest amount to put away in a savings account, the R6,000 per year that you’ll be accumulating (plus interest) will grow into a handy rainy-day fund. It may seem naïve to believe that you won’t take on more credit card debt, but you’ll definitely be making financial headway if you can stick to saving your modest R500 per month.
Once your rainy-day fund has grown to between three and six times your monthly income, that R500 a month could go into a 32-day notice account, or other long-term investments, so that you can grow your wealth faster. Using your bonus to clear your credit card debt could change the way you approach saving and investing completely.