Learn how to reduce your debt, so that you can feel more happy.
No one goes into debt willingly; either we unknowingly make a financial mistake, or we end up borrowing money in an emergency. In either cases, whether we are in debt to the bank, to a person or even a family member, it is always a burden.
However much it bothers us or hampers our lifestyle, our debts should, always be our top priority. Even if it means getting an additional job or reducing our expenditures by half, we should always make sure we pay back our debts as soon as we can.
If you have somehow fallen into debt, these 10 steps on how to reduce your debt.
Step#1: Reduce Your debt by Stopping Creating more Debt
Your first step would be to stop taking more loans or borrowing cash, or paying anything via your credit card. These are the three main ways we get into debt; so, the moment that you decide to tackle your financial situation, you need to restrain yourself from creating more. No more whipping out your credit card for a luxury purchase, no more asking a friend for money!
Step#2: Organize all your Debts
When you have multiple debts, i.e. bank loans, borrowed cash and outstanding credit card bills, your second step would be to organize everything. Use a spreadsheet and note down everything you owe others: all the bank loans you have to pay a monthly payment for, all the credit card bills you have to pay, the total amount of money you owe, deadlines, interest rates – everything.
This may seem scary at first, but after you’ve jolted down everything in one place, you might start to feel better. At least, when everything is written down in black and white, you’ll know exactly where you stand.
Step#3: Prioritize your Debt
Some debts are more important and urgent than others. If you have borrowed money from your parents or from a friend who needs it back immediately, these are the debts you need to settle as soon as possible.
Banks usually don’t mind if you can’t immediately pay their money back, because the later you settle their accounts, the more money they make from you. On the other hand, relationships with your friends or family members can deteriorate over borrowed money, and this is something you should avoid.
Step#4: How to Reduce Your debt by Paying Off At least One Loan
Start with the debt that’s the smallest or the most recent; even if you have to borrow from another account, pay off one of your debts. This is going to be the positive start that you need for this debt-reducing journey. If possible, pay off the loan that has the highest monthly payment.
Perhaps paying off the smallest loan isn’t going to matter very much when you have multiple other loans to deal with, but it’s still a start.
Step#5: Consolidate Your Multiple Debts
Consolidating your debts means to combine all of your debts into a single loan. This means that you’ll have to make a single monthly payment for your total loan instead of paying to several. Besides the significant reduction in hassle, you might even have to pay a slightly lower monthly payment than the total amount you had to pay before.
If this is something you are interested in doing, you need to find a bank or a financial institution that can give you a loan at the lowest monthly payment rate possible. This way, all your debts will be at one place, and easily calculable; even if the total amount sounds a lot when in a single account compared to when it was scattered, you can see what you owe at a glance.
Step#6: Increase your Monthly Payments
Even if you go on paying monthly payments for years, it’s not going to make a big difference in your debt. This is because your minimum payments every month is a combination of interest rate and the actual loan balance; you’re basically paying your interest more than the actual balance back. This can go on for a long time if you have no other way of repaying your loans, but this payment can go on for decades and your actual amount will not be covered.
You can increase your monthly payment to double the amount your bank wants you to pay; this way, you can cover the interest rate each month and then pay a significantly larger portion of your actual amount. If you can manage double the minimum amount, your loans might just be settled in half the time.
Step#8: Put The Rest Of Your Salary To Paying Your Loans
Apart from what you need for your rent, food expenditures, commute and other basic necessities, put the rest of your salary to paying your loans. If you can restrict every kind of extravagance, eat home-cooked meals instead of at expensive restaurants and sacrifice your vacations for a few months, you might be able to pay off a good part of your loan.
However, if your debt is excessively large, you might have to do this for a long time, and no one wants to live desolately for so long.
Step#9: Cash Out
If you have a rather large loan and you don’t want to live on a budget for a long time, it might be time for a desperate measure. If you have any means of some extra money, i.e. a retirement fund, a provident fund, insurance policy or inheritance, cashing out can be a good idea to pay back your loan. Of course, it might mean that you are losing out on a good amount of money in the future, but you’ll also be free of monthly payments if you no longer have debt.
Cashing out on your inheritance, retirement plan or insurance policy might not seem like a very good plan, but with all the money you’ll be saving from not having to pay your monthly payment, you can have another nest egg in no time at all.
Step#10: Liquidate your Belongings for Cash
If you are desperate to get out of debt but don’t have any funds to cash out, you have to make with what you have. For desperate situations, a few ideas could be to move out of your home and look for something smaller for rent, downgrading your car for something inexpensive, or even selling off your expensive belongings for cash. You might not be able to make the whole amount of money you owe, but liquidating your assets and belongings can help you with paying off a chunk of your loan.
If you own a house, you can rent it to others and live someplace cheaper; a smaller place will also be easier to manage and you’ll be saving a lot on maintenance. If you want, you can make a lot of changes to your lifestyle to save money, and use that amount to pay your loan.
No one, absolutely no one, likes to be in debt. It’s a burden and an uncomfortable situation at best. While no one intentionally or willingly gets under debt, you can at least do something about the situation. These are ten steps to reduce your debt, big or small; if not all, some of them could help you overcome this difficult time of your life.
