Debt: we’ve all heard of it, and I can guarantee, we all have it e.g. mortgage, loans, credit, etc.
This is what we discussed this week on the Rebel Finance School, a free online finance course.
How do we get in to debt? It could be life circumstances, company marketing, and purchasing.
The question is: what is debt and how can we protect ourselves from getting into more debt?
Debt is money borrowed from one party and given to another, usually in the form of a loan.
Debt is used to pay for products that cost a lot of money, that the debtor does not possess.
A loan must be repaired back in full to the creditor, with additional sums known as interest.
In this post, I talk about the 6 steps that you need to implement to eliminate of all your debt.
In each of these steps, I explain them and talk through them in detail, while giving examples.
Finally, I talk about how to make sure it doesn’t happen again and where to go for more info.
What are your Debts?
Do you have a fancy excel spreadsheet that you use to track your debt each and every month?
If not, no worries. That is the first step: knowing how much debt you are in as a starting point.
For each of your debt (car loans, credit cards, etc.) find the documents and note the following:
- Balance: how much is left that you owe.
- Interest: how much percentage is added every month/year.
- Minimum Payment: how much you at least have to pay every month/year.
Some of the debts may change over time. For example, it may change in interest after a year.
If that is the case, make a note of these changes and reassess the debt when the time comes.
The last part is to create a table in a spreadsheet where you can easily track the above debts.
If you don’t want to create your own, you can download a free template from vertex42.com.
Turn Stuff into Cash
The next step is to start paying off any debt that you can. There are two ways you can do this:
- Savings: if you have savings not assigned to anything, use some of that to pay off debt.
- Garage Sale: If you don’t have cash, maybe it is time to sell some of your unused stuff.
You may be thinking this is an unnecessary step. However, there are 2 benefits to doing this:
- Removing clutter: if your stuff is not being used, sell them on so other can use them.
- Eliminating liabilities: if you sell things that are debt, you end up removing that debt.
The goal is to think outside the box and think of ways that you can pay back your debt sooner.
This means a change in lifestyle, which is good: after all, your lifestyle is what got you in debt!
You can always buy back that stuff later on. The goal is to not prevent you from buying stuff.
However, the goal is to force you to buy stuff when you can afford it, not on credit or loans.
Increase Monthly Repayments
How much can you put towards paying off debt every month on top of what you are paying?
There are a few ways that you can do this. One way is to increase your income. For example:
- Rent a room: In the UK, you can earn £7500/year tax free by renting out a spare room.
- Start a side hustle: there are many businesses you can start without getting into debt.
On top of increasing your income, another approach is to reduce your current spending rate.
The goal is to increase your income and reduce expenses. Here are some things to consider:
- Bills: are you overpaying on bills? It may be time to shop around for better deals.
- Subscriptions: are you using all of your services? Cancel any you are no longer using.
By reducing your monthly expenses, you free up some money that you can put towards debt.
By increasing your income, you keep the same expenses, and put the difference towards debt.
Reduce Interest Rates
Did you know you call up your creditor(s) and actually negotiate paying a lower interest rate?
I didn’t know this either; I thought the interest that you have is what you have to keep paying.
According to Rebel Finance School, you can call and negotiate a lower interest. For example:
- Loans: Call up your bank and negotiate a lower interest on your personal loans.
- Credit cards: Call your provider and negotiate a lower interest on your credit cards.
This is the same as reducing your expenses. The more you can slow down the debt, the better.
The best way to do this is to call them and tell them that you cannot afford the repayments.
Tell them that the debt is crippling you and that you will need to move to a different provider.
Finally, ask for a reduction in interest rates and go silent – wait to see what they have to say.
Apparently, this actually works, but not always. However, you will never know unless you try.
Pay off all Debt on your List
The next step is to list all of your debts in descending order of interest i.e. highest to lowest.
By doing it this way, you will end up paying the least amount of interest over the long run.
Once that is done, make sure to pay the minimum payments on all your debts every month.
Even though you want to pay off the first debt as quickly as possible, you must still do this.
Next, put in any and all of your additional cash towards paying off the first debt on your list.
Attack the debt with the highest interest with all of your resources. This will take some time.
When you pay off the first debt, move on to the second one, without lowering your payments.
Keep up the same payments as you move down the list. Never lower your payment amounts.
Keep this up until you reach your last debt and paid it off. Celebrate once you have done it.
This will take some time, months or years, but keep up the repayments and the momentum.
Make sure Debt never happens again
It’s one things to have gotten into debt in the past: that’s alright, you didn’t know any better.
Now that you know better, how are you going to stop yourself from getting into trouble again?
- Emergency fund: Life happens, so make sure you have money set aside for rainy days.
- Avoid credit: Want to buy a new phone? Save for it. Don’t use money you don’t have.
Don’t listen to what companies are saying. Do yourself a favour and run far away from debt!
To learn more about how to get out of debt, check out the book: Get the Hell out of Debt.
This book will not only talk you through how to get out of debt, but will change your mindset.
Are you paying back a lot of debt? How is it going? Feel free to share in the comments below!
If you’ve enjoyed reading this, check out my blog post on What is your Financial Philosophy?
If you have any suggestions for future blog post topics, please share in the comments below!
