The best strategy to repay debt
Find the best solution to crush your debt
Debt can be soul-crushing, leaving you with a helpless feeling and not sure how you are ever going to repay this mountain of debt causing you to suffocate on anxiety. First, take a breath, there is a solution. Learning that there is a way out of debt and understanding debt will help you on your path to crushing your debt. In our previous blog we spoke about good debt vs bad debt, which should be used as a foundation to read this blog, but for now, let's start with common causes of debt.
Common causes of debt
Loss of income or low income: Living from paycheck to paycheck on a low income or a situation where someone in the household loses their income places a massive burden on these families, who usually turn to debt.
Emergencies: Not being prepared financially for lifes curveballs will make us look toward loans to fund these events. Once we have control over our debt we will look at building an emergency fund. An emergency fund is crucial for your personal finance.
Extravagant lifestyles: We live beyond our means by keeping up with the Joneses, with fancy clothes and cars. This lifestyle happens to most without them being aware of it, and they turn to credit cards to get them through the month.
Not budgeting: Not knowing your income and expenses, combined with not having a plan for your finances is the easiest way to accumulate debt. Your money needs to be put to work, and a budget is a way to implement this.
Why we don't like debt
Debt makes you a modern-day slave to your income: To meet the monthly requirement, you have to keep working at your current job to receive income, make the monthly repayment and stay in the debt repayment cycle. This situation gives you little freedom to change your career as you are dependent on that salary.
Debt builds stress levels and anxiety to the point where you feel buried alive: Studies have shown that debt creates the same negative emotions that addicts feel, feeling of shame, guilt, and loneliness. Because you were the person who caused this debt issue, it makes it that much worse, which generally leads to the bad habits continuing. Crushing debt effects can also have severe implications for your loved ones experiencing your debt spiral.
Higher debt leads to higher repayments: Higher debt level means higher monthly repayments, and higher repayments eat into your budget, making your life goal less achievable. Your debt is stealing from your future.
Quick debt tips to prepare you to repay your debt
If you have a large sum of consumer debt repaying a boat or car, and you can't be debt-free within 18-24 months, consider selling it. This massive cash drag acts as a ball and chain on your finances.
Sell all unnecessary items that aren't used, and repay some debt.
If you have savings somewhere or contribute monthly to any investments, stop the contributions, and add those savings to your debt repayment plan. You can reduce forced savings at work to their minimum contributions, this will help further your cause. The returns you make on your current savings accounts will be lower than the interest you are paying on your debt.
This one is the most important: Start budgeting. It can be very simple, set up your budget using our Finsesh budgeting tool or any other tool you prefer.
Jim Carrey once said: If you're not willing to downgrade your lifestyle for a year to have the lifestyle you want forever, you care too much about what other people think.
Methods to crush your debt
Below are two proven methods to repay your debt, you can use our debt repayment organiser, to assist you in sorting your debt and knowing which debt to start repaying first.
The mathematical way: The logic here is to repay the debt from the highest to lowest interest rates payable on these loans, saving money by shortening the period of accumulating these ridiculous interest rates and settling the debt earlier.
How it works:
List your debts, except your home debt. Rank your debts from the highest to lowest interest rates payable on these debts. Pay all your minimum monthly payments on all debts. The extra money from getting rid of all non-essential spending or budgeting monthly goes to the highest debt interest rates first. Once that debt is repaid, use the extra you spent on the first repayment, and add it to the next debt on your list. Then move down the list until they are all completed. Form a habit of cutting up cards and closing accounts as debts are repaid. You don't need this!
The debt snowball method: This method was made famous by Dave Ramsey, and it works more on the physiological boosts from repaying the smaller debts first and creating the snowball effect. He says that if you understood the math behind these loans, you would not be in this position, so it makes sense to get fired up by repaying the smallest debts first while building confidence along the way.
How it works:
List all your debts and rank the debts from the smallest to the largest debt. Pay all your minimum monthly payments on all debts. The extra money from getting rid of all non-essential spending or budgeting monthly goes to the smallest debt first. Once the smallest debt is repaid, it gives you a motivational boost. Use the extra cash you spent on the smallest repayment and add it to the next debt on your list. Then move down the list until they are all repaid. Remember the habit of cutting up cards and closing accounts as debts are repaid.
Now that you are aware of the common causes of debt and have tips to prepare you for debt repayment, with proven strategies to repay your debt. Combined with the knowledge, you are armed with all the tools to assist you to become debt free. The only way is to take control of your finances and crush your debt!
If you want to find out more about becoming financially independent, please see our free course. If you want a blueprint toward financial independence, you can do our Stages to financial independence course.
Onward to Financial Independence