Question: Although I earn a good salary, I have a lot of debt. How do I transform my debt into wealth?

Answer: In the words of David Copperfield’s Mr Micawber: “Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness.”   

I have helped a number of people achieve happiness by turning their finances around by 180 degrees. The plan is simple, but the implementation will take a lot of discipline from your side. It’s a bit like losing weight – we all know what to do; the challenge is to stick to the plan when temptation comes your way.

Here is the plan.

Draw up a budget

The first step is to get yourself into a situation where you spend less than you earn. This is done by drawing up a budget.  

You need to list all the items that you spend your money on each month. I have created a budget template that I am happy to share – just send me an email.

Go through a couple of months’ bank and credit card statements and write down the average amounts you spend.  You should find that what you spend exceeds your income.  You need to change this.

Reduce your monthly spending

In any budget, there will be items that are mission-critical for you and your family’s survival as well as items that are not crucial but do make life fun.

Now, we need to ensure that the bulk of your monthly spending goes on the items crucial to your family’s survival, and significantly less on the other items. Go through your budget and see if you can reduce what you spend on the crucial items.  

Now look through those items that are not crucial but make life fun and add a couple to your monthly budget, ensuring that your total budget is significantly less than your income. If it is not, then you should repeat the process.

Use the monthly surplus to get rid of debt

Before you can become wealthy, you have to get rid of your debt. To do this, you should:

List every item of debt other than your home loan.

Sort these according to interest rate.

Add the monthly surplus in your budget to the debt repayment on the item with the highest interest rate. You will find that this item will be paid off quickly.

Now add what you were paying on that debt item to the next debt item on your list.

Repeat until all the debt is paid off. You will find that your debt just disappears once this whole process gains momentum.

Invest in a disciplined way

Now that you have no more debt, you should find that you have quite a bit more money left over at the end of the month. This is all the debt repayments that you were making, as well as the savings from the budget.

This is the money that will provide you with wealth and financial freedom in the future.

Speak to a financial adviser to determine the most effective vehicles for your investments. It is important that you invest these funds at the beginning of the month and not wait till the end of the month to see what is left over. 

Our lifestyles have a way of stealing from the future and you will find that the amount left over each month will shrink significantly if you do not do this.

As you can see, turning your finances around is very simple, in principle. The challenge is to stick to the plan as far as possible. There will be setbacks, but it is important to keep your eye on the longer-term goal of spending less and saving more. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to [email protected].

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.