Most people will experience being in debt at some point in their lives whether from making an investment such as acquiring a mortgage or from an accumulation of credit used for day to day expenses.
Whatever the source there comes a time when you want to get debt free and start earning interest on your money instead of paying it out on the loan of someone else’s. If your total amount of debt is sizeable then this can seem like a very arduous process, particularly if the interest which accumulates on what you owe means that your efforts make little impact. When armed with a thorough and manageable plan of action, however, getting out of debt can change from an ongoing struggle into an achievable goal.
UNDERSTAND.
In order to solve the problem of your debt and to ensure that you do not accumulate more it’s important to understand why things got to the stage where you feel that action is needed.
Whether your debt takes the form of a mortgage, a student loan or credit cards think clearly about why you decided to borrow the money and if in retrospect that decision was justified. Did you borrow more than you should have or borrow for something non-essential? Did you not take care to watch overall expenditure because you had money to hand? Identify any mistakes you made so that you do not make them in future.
Offers of credit are ubiquitous to daily life and they all insinuate that you can and indeed should live at a vastly higher level than your means allow. These adverts suggest that there’s no harm in having a little extra but they don’t take any pains to remind you that credit costs money and if you start missing repayments it can cost you so much money that you get completely snowed under.
The sensible way to improve your lifestyle is to do so in tandem with your income. If you get trapped into a cycle of debt then even if you acquire more money you will just keep pitching higher still with your borrowing and spending.
Learn to appreciate the security that comes with only purchasing things you can truly afford and aim to live within your means instead of acquiring the means to live a different lifestyle. With proper saving and investments you will be able to improve your lifestyle slowly over time.
ACT.
If you have a lot of debt on your plate then do not get disheartened and depressed by it, this attitude will only make you want to ignore the problem and possibly spend even more money trying to distract yourself. View debt repayment like any other project; organize an overall plan and then get started.
Remember that this process is hardest at the beginning when the interest charges on your debt impede your progress to get the overall amount down. The less debt you have left the easier it will get to pay off so don’t lose heart if your first few payments only shave a little off your total owed each time. As long as you pay more than the value of the interest every month you will make progress over time.
A good way to make a solid initial impact on debt is to sell off possessions you can do without or get rid of items that require expensive maintenance. This will make your repayment goals more manageable before you even start worrying about your budget.
In order to start dissolving debt money is required, potentially a large sum, and to both save and earn more money a lifestyle change must be affected. Try not to see this as a negative thing; you are taking control of your finances and working to be without debt for the rest of your life.
Get Organised.
Get a good overview of what you owe and where. In some cases debt consolidation is a good idea and in some cases it is not, it depends upon what kind of deal you are able to get as regards the interest you will be paying. Look carefully at the terms of your agreement and avoid anything that penalises you heavily if you slip up on payments. Some schemes have such high penalty fees that a single mistake could wipe out months of saving.
It may be that you have some small debts that can be homed in on and eliminated very quickly or it may be that you have some debts with large amounts of interest accruing. As an example student loans are large sums but often have relatively low interest rates compared to small credit card bills which can start to compound extremely quickly if left untackled. Some debts can be sold on from collection company to collection company and an administration fee charged at each transfer or on each occasion when you are contacted. These debts can roll up extremely quickly with the interest on all the charges.
High interest debts are your main concern and need to be dealt with expediently. Arrange your priorities for repayments every month.
Establish contact at every point where you owe money and see if you can negotiate some leeway. Consider negotiating a bank overdraft limit at a lower interest rate if possible. In some cases you will be pleasantly surprised and in some cases you will not receive a very friendly response. Keep calm and collected and go through your list.
Once you have an overview of where you owe money it remains to scale down your spending, maximize your earning and use the resultant funds to get yourself out of debt. Make sure you have some support; it could be family members, understanding friends or on-line contacts over a debt help forum where you can get feedback and advice.
Budget.
A budget will allow you to take control of your expenditure. Many people fall into the trap of spending as much money as is available to them. In order to accumulate funds for debt repayments and savings you need to take the approach of considering carefully what funds are coming in and aim to keep any expenditure well within these boundaries.
Create lists of daily, weekly, monthly and yearly expenses. In this way you can catch irregular expenses as well as regular ones. Ask yourself what can be eradicated altogether and what can be done more cheaply.
The value of this exercise is to thoroughly list every single expenditure whether it’s that overpriced coffee every morning or the deal you have with your energy providers. Work through your list and see where you can get your expenses down. You might decide to sell your car and rely on walking or public transport or to shop at markets and cheaper stores for your groceries. By being thorough you should be able to make a substantial impact on your outgoing funds.
House and Home.
A good way to free up money is to downsize your home and find somewhere which not only costs less to rent but less money to heat and furnish. If you already have a mortgage you can consider releasing the equity accumulated in your home and using the cash to find a smaller residence and pay off some debt. As you downsize you can take any extra furnishings or household clutter to car boot or junk sales and use the proceedings against your debt.
Consider carefully what unnecessary expenditures you may have attached to your home such as cable for the TV or membership to various websites on your computer. These expenses can create a serious drain on your finances and while you’re in the mode of trying to pay off debt you’re much better off to take a minimalistic approach to such costs. If you’re struggling for ways to entertain yourself search out local meetings, groups and clubs, there are many rewarding activities which cost little or no money to participate in.
Talk to a frugal friend.
Sometimes when faced with downsizing your lifestyle it can feel like the world is going to end and that you will never get used to living in such a different way. Find a financially temperate friend and go shopping, socialising or relaxing with them and try to emulate their thrifty behaviour. You may well find that long walks outdoors are preferable to the gym, that picnics beat lunches at fancy cafes and that budget and thrift stores have as good an assortment of clothes as designer brand shops. Observing someone else’s lifestyle can be a great way to see that there are different ways to get what you need for very different price tags.
This process can also be good for your perspective. It’s often the case that a group of friends all assume that their lifestyles are as lean as they can possibly be and yet all the friends in the group have debt problems, usually there is a connection! Don’t be afraid of getting an outside opinion on your lifestyle, it could be the most important wake up call you ever get.
Income.
Once you have less money going out you will have some funds free to tackle your debts but to speed the process up you may want to earn additional income. Consider working a second job or finding a way to utilise skills you have for cash. Consider as many options as possible in order to find what will work best for your situation whether it’s blogging on-line, offering to teach the language you speak to students wanting some extra tuition or providing babysitting and dog walking services in your area.
Consider starting a small, independent business moulded around your free time and skills. If you work the business around something which interests you then the time will be spent enjoyably and you have the chance to build up another income stream.
Bear in mind that when you’re getting down to those extra hours of work you’re not sitting around wishing you had more cash to entertain yourself with. An excess of free time usually leads to an excess of spending.
MAINTAIN.
Learn the value of money.
There are various old sayings such as “look after the pennies and the pounds will look after themselves” or “a penny saved is a penny earned,” these phrases don’t intend to suggest that with a handful of pennies in a savings account you can end your financial woes but they do indicate that a frugal and aware attitude to your finances will get you secure in the long run.
An extra ten dollars in your pocket may only buy you a coffee and a sandwich at work but you could take your own lunch every day, which might cost you two dollars, and save yourself forty dollars a week. Think about what the money you have can do for you in a savings account or investment and not whose pocket you can rush and put it in as soon as you get your hands on it.
Aim to have only one credit card which is used for essential items that cannot be paid for in any other way and make sure you pay the bill at the end of every month. If you can’t afford the item don’t put it on the card. Stay vigilant when it comes to your finances and if your budget spiks up sharply or you’re drawn to a lifestyle that is beyond you then immediately start examining why.
When money comes your way don’t immediately start envisaging things you can purchase for that amount. Think of what you need and what you can scrape together to send to savings or debt repayment.
If you keep applying this approach over time then you will find that you have a substantial amount of money to buy the things you want without having to resort to borrowing to get them, in fact you may be able to do things you’ve never even dreamed of.