Many times I have seen my friends and relatives either struggling in neck-deep debt or slipping into a debt trap, losing their peace of mind. Debt brings along with it a host of worries. With debt getting out of control, life becomes a hell on earth. Yes, debt deprives you of sleep, breaks relationships, even marriages, and what not, it even leads to suicides! I had mentioned a few times on this blog that I too have been in one such particular situation a few years back. It literally shattered me into pieces in every sphere of my life. However, I was able to get out of debt fast by carefully analyzing and adopting some strategies. What were those strategies?
Basically, to get out of debt, to say in very simple language, you are supposed to do two things. Boost your income and slash your expenditure. However, that is more simply said than done! How do you successfully accomplish that? Let me detail:
Boost Income
The first and the foremost thing you need to think about in eliminating personal debt fast is ramping up your income with efficient time management. Think about how efficiently you are converting your time into money. If you don’t have a job at this time, think how soon and how best you can skew into a job. At least a part-time position to fetch an income will do.
If you are already employed, think about how best you are paid. Nonetheless, if you think you are underpaid for your effort, try to move into companies where you will be paid comfortably to lead a decent lifestyle.
Rather if you think you are best paid at the current job, then think about how you can convert your free time into money by doing some part-time work, maybe from home or otherwise.
If you are an entrepreneur or a self-employed professional, think of ways to rake in more revenue. Proper planning, efficient time management, and planned hard work should definitely bring some extra income in your hands.
Work out a Budget
Whether it is a country or a small nuclear family, financial discipline starts from budgeting. A deficit budget is the one that you run short of money and you still look at other avenues for borrowing to manage the expenses. A surplus budget is the one that you are left with excess cash at your disposal after you prudently trim the expenses. For you to be free of debt, you need a surplus budget. Thus pay off the debt with the spare cash.
Assuming the income being fixed, to make a budget surplus, we only have a choice left. Look at all possibilities to curtail expenditures. You can simply write down the expenses on a plain sheet of paper. Else get some apps or tools, plenty of which are available on the Internet for all operating systems, both free and paid. Allocate money for each expected expense for a month (or a week) one by one after careful analysis. The budget should be very much savings-centric and heavily inclined to avoiding any expenditure possible. Try to be frugal wherever possible; on electricity, groceries, clothing, gasoline, etc. Careful and calculated spending should leave you with surplus cash and savings.
This habit of budgeting the income and expenses, living within your means, and also saving should help you very much for a brighter future once you are out of debt.
Prioritize Spending
While working on your budget, prioritize the expenses depending on their importance and need. I stress here that “need” is different from “want.” Food, healthcare, clothing, shelter, and conveyance are the top priorities that no one can avoid. However, entertainment, club/gym memberships, jewelry, vacation, magazine subscriptions, throwing away parties are those expenditures that can definitely be avoided. Or at least until you are safely out of debt.
Even out of the needs, you can cut back on luxurious needs. Eg., expensive clothes, ice creams, branded items, eating out rather than carrying home-made lunch, etc. Think thrice before you spend on something. Think about whether you can abandon or postpone the spending. Avoid anything that you feel is a luxury. Nobody will help you while you are in debt but yourself. Stash some cash away as an emergency fund if any need arises. Away from easy reach but that can be reached in case of emergencies like a medical emergency.
Track Your Expenses
Not only successful budgeting but also keeping a vigil on the money spent by tracking the expenses on a daily basis is essential to get out of debt. As you did with budgeting, write down the expenses that you made a day at the end of that day. This should keep you aware of whether you are on the right track as laid in the budget or deviating away from it. It also helps you get to know the loopholes in your wallet. There are convenient tools and apps available right from budgeting, to tracking expenses, to reminding you of paying bills. Scour the Internet to find one that suits your taste and needs. Track the expenses then and there.
Pay Your Bills on Time
When debt gets out of control, people go wrong by not clearing their regular monthly bills on time. This further aggravates the problem. Your credit score gets affected. Late payment charges, fines, penalties, and interest start accruing further adding the burden. Avoid getting into such a situation. Never forget to accommodate the monthly bills in your budget. Pay the bills on time.
Cancel All the Credit Cards Except One
First of all, cancel all those subscriptions that automatically charge your credit cards. Credit card interest rates are the highest among all debts. Having multiple credit cards is the biggest ever sin you could do if you are serious about not falling into a debt trap. Keep one credit card and debit card each that are the best in terms of rewards and interest rates. Contact the rest of the credit card companies or banks. Offer them to fully repay the balance. Bargain and strike a deal. Cancel the rest of the cards one by one. Pay the outstanding amounts fully and destroy them. Repay the cards that have minimal outstanding or the cards that have the highest interest rates first. Maintain just one credit card properly. It will improve your credit score.
Sell anything that is of no use
Try to liquidate anything that you think is of no use to you and your family. Anything that is occupying space, without any returns, whether it is scrap or even an asset. Use the cash to clear at least one of your debts. I have seen families with multiple vehicles where the actual need is only for one. Similarly with vacation homes. The actual occupancy would be no more than a month in a year. However, prestige holds them back from selling or renting out at times of financial crisis. Remember, lesser commitments make life more easy.
Plan Your Taxes
Another drain hole that usually goes unnoticed for troubled people is income tax. Most of the income tax is deducted at the source by the employers. We seldom take care to know if we are taking advantage of the tax benefits. Research how best you can tweak the taxes to your advantage. Assume you are in the 10% tax bracket. If you are paying 24% interest on your debt, won’t it be wise to clear the debt compared to investing in tax-saving instruments?
Suppose if you are in the 30% tax bracket and have a home loan at 10% interest. Home loans come with tax exemptions. Thus it is best to enjoy those tax benefits. Use the saved amount to clear other debts with higher interest. So plan your taxes with relation to your debt.
Stop Investing
If you are having debts with interest rates of 12 to 24% or more and if you are trying to find investment avenues to fetch more returns than that APR on your investments, you are doing it wrong. Do not invest further. Liquidate any investment that has already been made. Clear the debts.
Stop Borrowing
Borrowing again to pay the interest on earlier borrowed sums or to pay off earlier debts leads you to a debt trap. Stop fresh borrowing.
A Mortgage is Better Than a Personal Loan or Credit Card Balance
Contrary to the above-said point, if you fully own home, applying for a mortgage to pay off the high-interest debts would be a good idea. Home loans are cheaper than personal loans or credit card debt.
Take Cash With You While You Go Out
Most of the purchases that everyone makes while being out are “impulse buying.” Don’t take your credit card while you go out. Instead, carry cash just to cover the expenses while you are out. That should prevent you from impulse buying and further accrual of debt.
Bottom line
Though I used to lock horns with my grandpa most of the time on several other matters, the basic finance lessons that I learned from him and my dad, helped me come out of the trouble unscathed. Essentially, all these were the fundamentals and strategies that I adopted to get out of the debt that I had inadvertently fallen into in my twenties These strategies should work for you as well. Know the only rule for a happy life: “Avoid debt.” However, if you have already fallen into it, wish you good luck to get out of debt fast. Else, until debt does us part, let’s live happily forever!
I am in one of those situations now. I have a credit card debt, not much, but it’s a choice I made that I am learning to live with these past few months. But you are right, wise decision with your money goes a long way in being debt free.