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, but that is more simply said than done! How do you successfully accomplish that? Let me detail:
The first and foremost thing you need to think about in eliminating personal debt fast is ramping up your income with efficient time management. Think 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. If you are already employed, think how best you are paid. 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. 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, may be from home or otherwise. If you are an entrepreneur or self employed professional, think of ways to rake in more revenue. Proper planning, efficient time management, and planned hard work should definitely leave some extra income in your hands.
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 us to be free of debt, we need a surplus budget and 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, which is looking at all possibilities to curtail expenditures. Either you can simply write down the expenses on a plain sheet of paper or get some apps or tools, plenty of which are available on the Internet for all operating systems, both free and paid, and 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.
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 which no one can avoid, but entertainment, club/gym memberships, jewelry, vacation, magazine subscriptions, throwing away parties are those expenditures that can definitely be avoided 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 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 medical emergency.
Not only successful budgeting but also keeping 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 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 loop holes in your wallet. If you want to keep the list with you always to avoid forgetting and to chart down the expenses then and there, 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.
When debt gets out of control, at one instant or the other, 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 situation. Never forget to accommodate the monthly bills in your budget and pay the bills on time.
First, cancel all those subscriptions that automatically charge your credit cards. With credit card interest rates being 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 you think are the best in terms of rewards and interest rates. Touch base the rest of the 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 paying the outstanding amounts fully and destroy them. Start with repaying the ones that have minimal outstanding or the ones that have the highest interest rates first. By having just one credit card will improve your credit score too.
Try to liquidate anything that you think is of no use for you and your family but is occupying space, without any returns, whether it is scrap or even an asset. Conduct garage sales. Use the cash so amassed to clear at least one of your debts. Many times I have seen families with multiple vehicles where the actual need is only for one. Similarly with vacation homes, where the actual occupancy would be not more than a month in a year, but prestige holds them back from selling or renting out at times of financial crisis. Remember, less commitments makes life more easy.
Another drain hole that usually goes unnoticed for troubled people is income tax, as most of the income tax is deducted at the source by the employers and we seldom take care to know if we are paying them to our advantage. Research how best can you tweak the taxes to your advantage. If you are in the 10% tax bracket and if you are paying 24% interest on your debt, then won’t it be wise to pay that 10% tax and clear the debt rather than investing in tax saving instruments or planning an early retirement? Similarly if you are in the 30% tax bracket with a debt that needs 10% interest payment, won’t it be wise to go for tax saving instruments rather than paying the tax and clearing the debt? So plan your taxes with relation to your debt.
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 and try to liquidate any such investments already made to clear the debts.
Borrowing at high APR to pay interest on earlier borrowed sums or to pay off earlier debts leads you to debt trap. Stop fresh borrowing.
Contrary to the above said point, if you fully own a home, applying for a mortgage to pay off the high interest debts would be a good idea, as home loans are cheaper than personal loans or credit card debt.
Most of the purchases that everyone make 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.
Though I used to lock horns with my grandpa most of the times on several other matters, the basic finance lessons that I learned from him and my dad, helped me come out of trouble unscathed. Essentially, all these were the fundamentals and strategies that I adopted to get out of debt that I had inadvertently fallen into in my twenties, and 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 do us part, let’s live happily forever!
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