Have you ever thought about what would your life look like without any debt? People don’t realize how stressful it is to worry about different payments all the time. It also takes a lot away from your goals and dreams. What if you wanted to start a new business or travel more? A lot of these goals are very difficult to achieve with piling debt on top of you. On top of that if you don’t take care of your debts soon enough, they can put in a very bad situation or in a vicious cycle. Let’s take a look at some of the basic things you can do to solve this problem.
UNDERSTANDING DIFFERENT KINDS OF DEBTS
I am not going to get into the different technical definitions of different debts, but I am going to focus more the good vs bad aspect of different kinds. A lot of people when they don’t want to focus on their problem try to label their situation as being in ‘good debt’.
Have you ever heard of a good kind of flue? Exactly! A lot of people think of student loans as the good kind of debt. They use excuses such as, the amount of money you are borrowing will lead to intellectual or personal growth and the difference in salary before and after getting a degree will easily make up for the amount borrowed. But clearly that’s not true. The entire US economy is filled with unpaid student loans. You can end up paying for it for years or even decades.
The next example that peoples bring up is mortgage. They say, “well you are getting a house out of it so it’s a necessity”. But this again is a grey area. Some mortgages are bad, and some are less bad. If you have a bad credit score banks will try to offer you riskier terms for the mortgage, prime example being adjustable-rate mortgages. Some of the better deal would be to pay as much advance as possible and leave as little as possible for a mortgage. Even if you do get a mortgage, make sure its fixed rate and the monthly installments don’t cross above 25% of your entire salary.
MAKE A BUDGET
The first step to get out of this situation is to assess what your monthly financial situation is like. Make a list of all the things you spend money on and start cutting down on the frivolous expenditures. You will never realize how much you are overspending on stuff you don’t actually need. Making a budget makes it easier to get your finances in order.
LIST ALL THE DEBTS
The next step is to make a list of all the payments you make for different loans, mortgages and bills. These include credit card bills and car payments as well. Get them in descending order of amounts, starting from the highest. This way you can start prioritizing payments.
USE THE SNOWBALL EFFECT
Let me show you one way of getting rid of debts one at a time. now that you have a budget and a list of all the payments, first make all the minimum payments for each of the loans and debts. Whatever you are left with, use that along with any other extra income you may have, maybe get a second part time job, and use all of that extra money to pay off the smallest debt.
Keep doing this till the smallest one is gone. Then use all the extra income you were using for the smallest one into the next one. Go on and on like this till you reach the last one. What will happen here is a snowball effect. With each debt gone, you will have more and more money to pay off the next one.
But one thing to keep in mind here is that don’t keep piling on new payments. You will have to discipline about it. This is where a lot of people give up, they have the self-control to lay off of new expenditures for some time.