Paying off your debts can be taxing. They can give you panic attacks everytime the bill arrives. It can haunt you and give you sleepless nights.
This article will help you how to slowly pay-off your debt based on my personal experience. Please do note that this is only a piece of personal advice and it’s always best to seek advice from a professional if you can afford it.
Understanding how your debts grew
The first step in your journey is understanding how your debts grew the way it did. If it was caused by an emergency, don’t blame yourself too much. If it was something avoidable, then learn lesson from it. Do concrete steps on how not to fall into the same trap again.
List down all your debts
Now that you’ve understood how you fell into the debt trap, it’s time to list down all your debts. This is the most stressful part as it’s the part where you realize how much you actually owe.
At this point, it is very easy to give up. Do yourself a favour, just don’t! The longer you avoid your debt, the larger it will grow!
Prioritize which ones to pay first
There are two popular ways in prioritizing debts, the debt snowball and the debt avalanche. They are two very different approaches, but the goal is the same – to living a debt-free life.
No matter which one you choose, make sure to settle the minimum payment needed for each credit line so your debts stay in good standing. Some credit cards raise their interest rates if you miss the minimum payments.
Now, it’s time to choose which of the two methods to use as your weapon in battling your debts.
What is the debt snowball?
The debt snowball is when you pay off your smallest debts first, then moving on to the next one. This approach is often recommended by other people as it gives you a sense of fulfilment as you are settling some of your debts faster. They also claim that this approach makes people more likely to stick in their debt repayment plan.
It’s like paying your debt, gamified! You start off at the easiest level, then it gets harder as you progress. It keeps you motivated as you squash each of the levels, one-by-one.
The debt snowball is not without fault though. If you follow this approach, you might end up delaying a high-interest debt thus charging you more interest the longer it stays. If you’re feeling braver, you can try the other approach – but it will definitely make you pay less interest in the long run.
What is the debt avalanche?
The debt avalanche, on the other hand, is paying the debt with the highest interest rate first before moving on to the next one. Mathematically, this makes more sense as you pay less interest.
This approach is not for everyone though especially if your biggest debt is also your debt with the highest interest rate. You might get discouraged that you’re not moving on to your next debt fast enough.
Find interest-free credit lines (optional)
Now, it’s time to leverage your network. You can try to approach your friends or family and ask them if you can get an interest-free loan from them. I know it takes guts to do this, but use this as a motivation not to miss payments.
Before I ask my friends or family for a loan, I explain my current situation with them and explain fully why I need the money. Be as transparent as possible. This might scare some of them, but others might find your honesty a reason to lend you money.
Then, give them a sound repayment plan. Make sure it’s realistic. Always ask if you can pay in instalments.
If ever someone grants you a loan, use this right away to pay for the minimum payments of each debt, then to your debt with the highest interest rate!
Create a debt repayment plan
Hopefully, by now, you’ve chosen between debt avalanche and debt snowball. Sort the list of debts you made earlier either from the largest debt to the smallest OR from the highest interest rate to the lowest depending on which approach you’ve chosen.
Then, try to list out all your monthly income and expenses. It helps to look at your credit card bills when doing this. Highlight the expenses that you can actually avoid or reduce. This could be a subscription to an unused online service, excessive online shopping or going out too much for drinks. Try to discern which of your expenses are actually luxuries than necessities.
After you’ve listed out all your necessary recurring expenses, pad it by 10 to 20-percent. Subtract this padded expenses from your monthly income. If you’re saving for an emergency fund, set aside some money for it. Don’t save too much money while you’re in debt though. The interest rate of your debts are usually way higher than the interest rate of your savings account so it’s actually counterintuitive to save too much!
Use the remaining amount you have monthly to pay off your debts. Try to be as consistent as possible. If at the end of the month, you still have spare cash, treat yourself a bit and use the rest for your debts.
Now that you have a repayment plan, it’s time to avoid accruing more interest.
The first rule would be never to miss the minimum payment for any debt that you have. Then, try to use your credit card with the lowest interest for your monthly expenses. Use the money you’ve set aside for these expenses to pay for the debt with the higher interest.
In dealing with debt, always remember these points that I’ve already pointed out earlier:
- Delaying dealing with your debts will just make them bigger.
- Always pay the minimum payment needed for each debt every month to keep your debt in good standing.
- Don’t save too much money. Interest rate of debts is always greater than the interest you’ll earn from a savings account!
- Keep your unnecessary spending to a minimum.
- Don’t forget to treat yourself from time to time!