“Spend less than you earn and stay away from consumer debt”.
Whilst this is something we all need to learn and apply, when you find yourself in a big hole of consumer debt it is about as useful as being told to “mind the hole” after you have fallen into it.There also isn’t a natural end to vicious cycles of debt.
It’s easy to beat ourselves up over debt, but “when you find yourself in a hole…stop digging”. If you are in a job, working part-time, or have your own business, there is a way out of the hole.
Some facts about debt
- 72% of households have consumer debt
- 85% of household income is committed to debt repayments
- 90% of households buy things they can’t afford
- 60% struggle to make minimum repayments
- 77% have no money left at the end of the month for savings
Once you start down the slippery debt slope – using credit cards and overdrafts and store loans and IOU’s to buy things with future earning – the only way out of it is to consciously get yourself out.
STEP 1: Recognise You Have Consumer Debt and Commit to getting out of it.
Denying that consumer debt is bad for you and your wealth, is one of the biggest reasons many people around the world, never break free from it and never get to experience financial freedom.
Getting out of debt is hard. It takes commitment and discipline. It requires choices to be made and possibly lifestyle changes. Right now it may be hard to even contemplate the abstract state of being debt-free and what that actually means for you.
Think about the things you will do and have when you have no more debts to pay off. What are those dreams you really want? Is it buying a home, having exhilarating adventures every year, sending your kids or grandkids to college, or being able to stop working so hard?
Stop and think about that right now.
STEP 2: Know how much debit you have
You cannot break free from something unless you know its size and shape! When people don’t know the full extent of their debt they invariably fall off the wagon and end up back or deeper in debt.
You must determine the true scale and nature of the hole you are getting yourself out of.
In a spreadsheet list all your debts (credit cards, store cards, over drafts, student loads, car loans, IOU’s), get it all on the sheet. Then against each listed debt, list the outstanding debt balances, the interest rate you are being charged and the minimum payments you must make on each debt. All this information should be on your debt statements. If you can’t find the information, then contact the company you are indebted to and ask them for this information. Then add up the outstanding debt balance and the minimum payment columns and this will tell you the total amount you owe and the total minimum payment you have to make each month just to keep up with your current debt repayments.
If you’re shocked by the numbers you see, just remind yourself that this is the highest the number your debts will ever be. You are committed to claiming back your freedom and within just one month those numbers will get smaller.
STEP 3: Negotiate a lower interest rate
If your credit card interest rates are so high it feels almost impossible to make headway on your balances, it’s worth making a call to negotiate a lower interest rate. Believe it or not, asking for lower interest rates is actually quite commonplace. And if you have a solid history of paying your bills on time, there’s a good possibility of getting a lower interest rate. Always remember, the worst anyone can say is no.
STEP 4: Create a budget
If you really want to pay down debt faster, you’ll need to cut your expenses as much as you can. One tool you can create and use is a budget. With this strategy, you’ll cut your expenses as low as they can go and live on as little as possible for as long as you can.
A bare-bone budget will look different for everyone, but it should be devoid of any “extras” like going out to eat, cable television, or unnecessary spending. While you’re living on a strict budget, you should be able to pay considerably more toward your debts. Remember, bare-bones budgets are only meant to be temporary. Once you’re out of debt — or a lot closer to your goal — you can start adding discretionary spending back into your monthly plan.
Here’s to you being free of debt forever