How to get out of debt – 6 simple steps to destroying your debt and finding financial freedom
When the term how to get out of debt comes up, many people roll their eyes and quickly mention why it’s impossible to live this life debt free. A professional debt counselling firm might greatly improve your chances of becoming debt free, but here is what you can do in the meantime.
So many expenses and surprises lie and wait along the road of life that at one point or another, you are going to have to bite the bullet and make debt, whether you need to study, pay for your first house, or for your daughter’s wedding. That’s the argument you hear from friends and family right.
Mostly, your loved ones who pitch in with advice like this are indebted themselves and mean well. They want you to live well, with all the comforts you desire. This may just be what they have come to expect from life and how to get out of debt has never been a blip on their radar.
The reality is that many people are over-indebted and actually in need of a great debt counsellor. The Debt Review process which consists of debt counselling is often successfully completed by individuals who are over-indebted and find help before it’s too later.
There is a culture of making debt that sometimes begins in our parents’ homes. Many new parents need to take the plunge and make debt when the costs of raising a child start ballooning. Usually, as it is so easy, making more debt is seen as a way to reach financial life goals much faster, like buying a house or a new car. So you take out a loan here and there in an emergency, you buy that laptop you really can’t afford right now, but hey, it’s only a few hundred Rands a month, and shouldn’t break the bank. And you splash out on your child’s wardrobe with brand-name clothing, seeing as “all the other kids are wearing this”. Everything ads up. You as parent then act as an example of how to get into debt, something your children might emulate later in life. This is not a good start if you want to know how to get out of debt, as you might suspect.
This culture of making debt is sometimes bolstered and dished out as good advice from a parent to a young adult. So no wonder we end up over-indebted.
What is the alternative to not making debt you ask? This comes back to a notion that not many people like to hear. You should have started planning your financial security, yesterday. Reacting to any emergency financial situation can mean two things. You either use your emergency financial fund, which you planned and saved for in advance, or you make debt because you have no extra fund.
Most people who are over-indebted say that they had little choice in the matter. But how true is that really? Most financial expenses aren’t so sudden and extreme that they force us into debt immediately. Even when it comes to medical emergencies, we have the option of taking out a medical aid which will cover most of our medical bills.
We actively participate, decision by decision, in getting ourselves further into debt. How to get out of debt is pretty much the same procedure. It’s a step by step thing.
Step 1 – Get serious about your finances
People go on diets, and some stick to them, but most flake out and go to task on an unsuspecting chocolate bar. You don’t have to be this person in life. When it comes to how to get out debt, there are also more serious repercussions to not solving your debt problems, like sequestration and liquidation and legal action being instituted against you. How to get out of debt is not something that can be done in half measures.
Step 2 – Schedule a moment to take stock of your finances
Take a deep breath, try and calm your nerves, and take time out of your busy schedule to have a look at the financial chaos you might feel you are in. This is essential if you want to know how to get out of debt. What is happening when it comes to your finances? This is what you need to know after you’ve completed this step.
Do consider that your finances and how you spend can be subjective. You have been living your live in a certain manner for the last few years, and it might be difficult for you to identify some expenses as excessive or unnecessary, just because they have become part of what you expect from life. Nevertheless, if you look hard at your expenses you will begin to identify a spending pattern and also discover where the largest chunk of your salary is going.
Step 3 – Chase down those elusive numbers
In order to identify your spending habits, you will need information. So first, set up a document, and list all your Must-expenses. Must-expenses as the term implies, is everything that you have no choice about, things or services that you need to pay for every month without fail. This is things like food, rent, and other debts. With the total amount of must-expenses calculated, you now know exactly how much you must fork out monthly.
If there is anything left over from your salary, this is seen as surplus. Usually, what people do is they use this money to treat themselves, even in small ways. It’s money to live, a bit of cash to splash. And once the cash been splashed on new shoes and a nice dinner, we are cash strapped until the end of the month when salaries are once again deposited into our bank accounts.
A good way to see how you splash, is to collect every receipt from every transaction that you are involved in during the next calendar month. Have a small box in your car and home that you can put all your receipts in. If you spend like you usually do, you will definitely gleam something from the string of receipts at the end of the month. Don’t just tally all your totals. Enter every item purchased into your spreadsheet with its price.
Now that that you’ve got a good idea of your must-expenses and splash-cash habits. You can bring all this information together while in the process of learning how to get out of debt. Set up a new spreadsheet and divide it onto to these two sections: Must-expenses and Splash-expenses. You can now take every expense you have and place it under either one or the other. Be honest with yourself here. To buy a cup of coffee from a fast food establishment every morning after gym might seem like such a habit, and seem so necessary that you might feel it’s a Must-expense, but be serious, it’s not. So you need to think long and hard about those options you are uncertain about. Gym membership which you feel is a Must-expense, might actually just be a Splash-expense. Splash expenses are those expenses which you can easily live without, or find an alternative to where you don’t have to fork out that much cash. Gym membership can be replaced by ‘free’ jogging in the outdoors and weight training at home. The savings can add up.
Step 5 – Adjust your financial expectations and goals.
You’ve now identified how wasteful or how well you can manage your expenses which gives much more insight and power when you are considering how to get out of debt. Anything on the splash-list needs to go. Taking that into consideration, if you can manage to eliminate your splash list, you suddenly sit with all that extra cash. What is most important, eating out every week, or getting to a debt-free stage in your life and making sound financial investments?
Step 6 – Take aim, and destroy your debt
It’s here that you need to list all your debt and the one at the top should be the debt with the highest interest rate. This makes a lot of a sense and is called laddering. It works well because you will save a lot on interest by paying off your highest interest debts off first. Its one successful strategy on how to get out of debt.
Alternatively, you can list debts from largest to smallest and tackle your biggest debt first. The idea is you use as much of your splash-cash to help pay off debts. This will put you on the track and be the way you go about becoming debt free.
There is no shortcut really, and people don’t like to hear that. Many of these steps can be greatly improved with knowledge from a professional debt counselling firm.