5 Steps to Eliminate Your Debt

Part 1 of 5 in the series Financial Planning
  • Why Debt is so Insidious
  1. Assessing the Situation
  2. Seriously Budgeting
  3. The ‘Debt Avalanche’ Method
  4. Trimming Your Expenses
  5. Accelerating the Process

(Photo by Dylan Gillis/Unsplash)

“Interest on debts grow without rain.”

– Yiddish Proverb

Debt almost seems like it is part and parcel of life. After all, just about everyone seems to be mired in it… except the rich and famous.

Right?

Wrong. Debt is not a normal state to be in. In fact, it should be avoided at all cost because it robs you of your financial future.

There are 2 kinds of debt:

The first kind you take on when you make a big purchase such as a house or a car. Generally, you should aim to pay for your car in cash… and where possible, pay for your house in cash, too, or at least with as quick payoff terms as possible.

Either way, you’re buying an asset that will serve you well.

The second kind of debt is unnecessary and usually the result of people trying to achieve immediate gratification. Entertainment, frivolous purchases, buying branded items just to show off – and doing all of it on credit cards or using lines of credit is a sure-fire way to financial ruin.

Millions of people just aim to pay off the minimum each month on their cards and never seem to climb out of debt.

What people fail to realize is that debt will keep getting worse unless you pay more than the minimum. Only then will you start getting rid of the outstanding debt fast.

Why Debt is so Insidious

When you’re in debt, your income is depleted because a huge chunk of it goes towards paying the interest. Over and above that, you’ll be financially stressed out because of the never-ending bills.

Let’s not even talk about the financial servitude here. You’re a slave to the credit card issuer or banks and until you’ve paid up your debts, they have control over you.

It’s very hard to get ahead when debt is crippling you. Imagine the amount you’ll save if you’re not paying massive bills every month.

The money you save can be put towards your retirement. Or you can take an extra vacation every year and so on. You’ll have more options when you’re debt-free.

The true cost of everything you purchase becomes an illusion if you rely on credit to make purchases. This is why you need to understand that if you can’t pay for it with cash, that means you can’t afford it.

Debt will make your purchases more expensive. A $2,000 TV that’s paid for with a credit card can end up becoming $3,500 or more, if all you ever do is pay the minimum amounts.

This will mean you’re working harder for your money because most of it is going to pay the interest on your revolving credit. You MUST put an end to debt ASAP.

Below you’ll find 5 steps to follow. Adhere to them closely and you’ll eliminate debt once and for all.

Step #1 – Assessing the Situation

This is the MOST important step of the lot and yet so many people avoid it. It’s understandable. They’re afraid of looking at the bills or just coming to terms with how deep in debt they are.

However, you’ll need to know exactly where you stand in order to formulate a debt reduction plan. What gets measured, gets managed.

So, compile all your bills, loans, etc. and write down exactly how much you owe for each bill. Note down the interest rates of each card, loan, etc.

Your mortgage payments, utilities, car payments, etc. should ALL be noted down. Leave NOTHING out.

What you will have now is a list of all your monthly payments. Compare that against your income and you’ll know why your finances are stretched.

If you’re married, you’ll need to make a list of your spouse’s bills and income too. Discuss with your spouse if both of you will be tackling debt jointly or individually.

If one partner comes out of debt and the other is still mired in debt, your finances will still be affected and you won’t be able to reach your full potential when investing and/or preparing for retirement.

The goal here is to eliminate debt completely.

Step #2 – Seriously Budgeting

The benefits of having a budget cannot be overstated. But even before we create a budget, there is one IMPORTANT thing you must do.

You’ll want to call up all your creditors and ask them for a lower interest rate. By showing them that you’re willing to make good on what you owe, they may assist you and lower your rates.

In some cases, they won’t – and that’s fine. But you MUST ask. If you don’t ask, the answer is always no.

Negotiate with all your creditors and see how much you can save. If you’re thinking of consolidating/refinancing your loans, be VERY CAREFUL.

Sometimes, the lower interest rates you get will only last for a short while and once the new interest rates kick in, you might end up paying more than you normally would if you were paying the bills separately.

When creating a budget, you’ll want to adopt a method that’s known as ‘zero-sum budgeting’. In this method, every single dollar of your disposable income (take home pay) has a specific purpose to it.

You’re either using it for your expenses or to pay off debt… or maybe for your savings. With your budget, nothing is left to chance. It’s an excellent way to keep track of your expenses and manage debt effectively.

One of the bugbears that many people have is that they just can’t control their spending habits. That’s usually because they don’t have a plan to follow.

With a budget, you’ll know exactly how much you can spend each day. You may even want to follow the ‘envelope method’ where you have 30 or 31 envelopes for each day of the month.

Place your ‘allowance’ for that day in each envelope. For example, if your budget only allows you to spend $25 a day, you should have $25 in each envelope.

Try and have ‘zero-spend’ days where you don’t use any of the money in the envelope. Packing your own food for work, etc. can help you to keep the money in the envelope intact.

Whatever you do, follow your budget as closely as possible. Always pay your bills first and on time before spending the money.

Step #3 – The ‘Debt Avalanche’ Method

When it comes to paying off debt, there are 2 methods that have been proven to work. One is known as the ‘Debt Snowball’ method… and the other is the ‘Debt Avalanche’ method.

Both are effective… but we’ll be discussing the debt avalanche method because it’s infinitely better.

The debt snowball method is about paying off your smallest debts first. This will give you an emotional win because you’re seeing your debts disappearing.

However, this method does not pay attention to the interest rate of the different debts. As a result, the method is not as cost-effective and also takes much longer.

The debt avalanche method will have you paying off your highest interest bill FIRST.

For example, if you have a $4,000 outstanding balance with one card and the interest rate is 18%… whereas another card has an outstanding balance of $800 but the interest is 14%, you’ll focus on the $4,000 balance first.

That’s because it has a higher interest rate. It may seem like paying off the $800 bill is easier and it is… but you’ll be paying more in interest overall, because of the higher interest rate on the first bill.

This is how you’ll go about paying off your bills with the debt avalanche method:

  1. Arrange your bills in descending order (the highest interest rate at the top, followed by the next and so on).
  2. Write down the minimum amount you need to pay for each bill.
  3. Calculate how much more you can pay over and above the minimum for the first bill (with the highest interest rate).
  4. Pay that amount for the first bill, while paying the minimum on all the other bills.
  5. Do this until the first bill is completely paid up. Now you’ll have extra money to pay towards the next highest interest bill.
  6. Pay the extra you have + the minimum on the next highest interest bill… while making minimum payments on the rest.
  7. Repeat the process and you’ll see that with each bill cleared, you’ll have an avalanche of cash to wipe out the other bills much faster.

Step #4 – Trimming Your Expenses

Once you have a budget and you’re following the debt avalanche method, it’ll be time to free up more of your money. The easiest way to do this will be to reduce your expenses.

The money you save by reducing your expenses can either be saved or used to pay off more of your debt and accelerate the debt elimination process.

No matter how frugal you think you are, you’ll definitely be able to find ways to save money if you look for them.

Here are just a few ways to reduce your expenses:

  • Eat at home and avoid restaurants.
  • Pack your food for work.
  • Cancel your cable subscription. Netflix and other streaming services are cheaper.
  • Avoid buying branded goods. Go for generic labels instead.
  • Save electricity at home. You’ll have lower utility bills.
  • Use coupons for shopping.
  • Use public transport if it’s cheaper than driving.
  • Make your own coffee instead of buying it.
  • Only use your own bank’s ATMs so that you don’t get charged fees.
  • Pay your bills on time and avoid late charges.
  • Declutter your home and sell off what you don’t need.
  • Buy items like toilet paper, pet food, diapers, coffee, laundry detergent, etc. on sale in bulk. You’ll save on expenses in the long run.

These are just some of the ways you can live frugally. Your goal should always be to get the best deal. Look for discounts, cash back savings, etc.

If you have perks for using your credit card, do use them to help you save. As long as you pay off what you’ve used by the due date, you’ll be fine.

It’s important to note that even if you’re in debt, the credit card is still a tool. It’s not the card’s fault that you’re in debt – it’s your spending habits.

In order to use your credit card responsibly, you’ll still need to use it and pay up your bill on time. As long as you stick to your budget, you can still use your cards without any issue.

Your debt repayment plan will be on track and your credit score will also improve over time.

Step #5 – Accelerating the Process

One of the best ways to speed up debt reduction will be to earn more. Once you’ve trimmed your expenses to the best of your ability, the only way to do better is to increase your income.

You can do this by taking on a second job on a part-time basis. You could become an Uber driver or paint fences. Any job such as pet sitting, babysitting, house sitting, dog walking, etc. will help you earn more.

If you have a trade skill such as plumbing, air-con repair, etc. you could have your own side hustle and make good money, especially when your services are required after office hours. Your rates can be higher and you can make more.

It may seem like you’re working harder than ever and that may be true… but you only need to do so until about half your debts are paid up. This refers to your revolving credit such as your credit cards, etc.

Once you’ve paid up half your debt, the income you make from your day job and the debt avalanche method will help you pay off the rest of the debt much faster. It’s ALWAYS toughest at the start.

When 50% of the debt is paid off, you’ll be able to breathe a sigh of relief. You can then decide if you want to carry on with your side hustle and pay off the rest of the debt fast – or stick to your day job and go slower.

There’s no right or wrong answer here. Do what’s right for you. Debt can take a long time to settle. So, it’s better to ramp things up a little to speed up the process.

In conclusion…

Besides the pointers above, you’ll also want to track your spending closely. Monitor your expenses weekly, rather than monthly.

If you find it hard to hold yourself back from spending, cut up your credit cards so that you’re not tempted to spend. Use cash for everything. It’ll help you stick to your budget easier.

It’s also important to know that the short-term thrill of instant gratification that accompanies a purchase will never be better than the feeling of being debt-free.

Shopping is NOT a good form of emotional therapy, if you’re prone to debt. Find other ways to bring yourself joy.

Watching a movie at the cinema is not really that much different from watching a movie on Netflix at home. It’s just cheaper at home and you’ll save money by not getting a ticket or paying for overpriced popcorn.

Look for ways to improve your skills so that you can earn more in the marketplace. If you enjoy the finer things in life, your income must be in alignment with your desires. The more you earn, the more you can spend (within reason).

Use the tips in this guide to get rid of debt and make a promise to yourself that you’ll stay debt-free forever.


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