Finding Freedom From The Prison Of Debt

Debt is something that we all have to live with. If we take on a mortgage or any other kind of loan, we’re taking on debt. However, sometimes, that debt can start to grow worryingly large. At that point, it can threaten our financial well-being if we don’t start taking an active stand against it. Here, we’re going to look at what you can do to start chipping away at your debt and strategies you can use to hopefully eliminate it from your life once and for all or, at the very least, make sure that you’re only holding planned and structured debt.

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Don’t fall into financial denial

One of the most common mistakes that people get into when they first see the real size of their debt laid out for them is to fall into what many have called financial denial. This typically means that a person stops paying attention to their finances, stops looking at their accounts, and takes no active action to tackle the problem. It’s understandable. It can feel worse to think about your debt than to ignore it but ignoring it will only exacerbate the situation and lead to more stress down the road. You should take the time, instead, to formally lay out all of your debt and get a good idea of how much you have to pay off, so you can start coming up with a plan, instead.

Budget with your debt in mind

The very first thing that you should do is get an idea of how much you are able to start putting towards paying off your debt. To that end, you should put together a budget. Your budget is going to help you lay out all of your expenses, including your discretionary expenses, as well as your financial goals. A good rule of thumb for a budget is the 50/30/20 budget, where half of your income goes towards essential expenses, including rent, groceries, insurance and so on. 30% goes towards your discretionary expenses and 20% goes towards money goals, which should include paying off debt.

Look at discretionary expenses you can start cutting down

If you think that you don’t have enough of the 20% mentioned above to start dealing with your debt effectively, then you may need to look at reducing your other expenses. You can’t really reduce your essential expenses without serious dips in your quality of life, so you should look at how you can cut down on your discretionary expenses more often. If you want to get a real good idea of which of them might be costing you the most money, you can start using an expense tracker to keep note of every time you spend money. This can make it easier to see your financial habits which, in turn, can make it easier to adjust them.

Avoid borrowing when you can

If you’re currently looking at a sizeable amount of debt, then the first thing you should do, if possible is to stop adding to it. Sometimes, you may need to rely on debt to meet your financial obligations and steep costs. However, it’s always a better idea to avoid things like small loans, which also tend to come with higher amounts of interest. You should also avoid spending with your credit card until you are free from debt. Using your credit card responsibly can be good for your financial health, but you should wait until you don’t have as much debt, in general, bearing down on you.

Consider the snowball method

Structuring how you pay off your debts is a good idea, as well. There are a few different approaches to this. Rather than paying off all of your creditors equally, you should weigh your payments towards them, so long as you make sure that you’re paying the required minimum debt repayment any of them may have. The snowball method is one that sees you paying the smallest debt first, with the logic that completely eliminating one source of debt, even if it is a small one, can offer a feeling of stability as well as a morale boost, making it seem like the problem has immediately gotten smaller. This can then incentivize further debt repayments.

Consider the avalanche method

The snowball method does take into account human psychology when repaying debts and does offer a great sense of reward whenever you make progress towards your final goal of eliminating debt. However, some would argue that it is not the most cost-efficient way of paying back your debt. The avalanche method takes a different approach, encouraging you to pay off the debt with the highest interest rates first. This is because the higher the interest rate, the more that the debt is going to cost you the longer that you keep it. As such, you would save more money by paying that debt off first, even if it means holding onto smaller debts with lower interest rates in the meantime. 

Ask for some advice

If you’re looking at a seemingly insurmountable amount of debt or you’re worried about how long you’re going to be stuck paying it off, it can seem like you have very few options. However, if that’s the case, then you should get in touch with financial advisers who can help you formalize your approach to it. Aside from helping with some of the things mentioned above, like budgeting and reducing your costs, they can inform you about other options like debt consolidation and restructuring debt. They can also provide advice on how to better manage your finances in future so that you’re less likely to fall into debt again. You can make sure that you’re making use of the best options by relying on someone who knows finances much better than you might.

Get in touch with your creditors

If you ever think that you’re going to have a problem with paying back your debt, as is, then you should get in touch with your creditors, first and foremost. Talking to them about what you’re able to afford to pay back can help them find the right structured approach to deal with your debt. They may offer more wiggle room than you might think, as most creditors would rather work it out with their debtors than have to get the collectors involved. They tend to be a last ditch effort when communications have totally broken down. Avoid making any promises you can’t keep, such as overstating how much you are able to pay.

Reconsider how you use debt in the future

We are creatures of habit so, even after we get out of one tight spot, it’s not always safe to assume we have learned the lesson that will avoid us falling into that very same spot again in the future. To that end, you should think about how you make use of debt in the future and think about the financial decisions as well as the unintended events that led you to fall into debt in the first place. Taking steps like having insurance in place for major costs and being more responsible with how you use things like overdrafts or other forms of debt can help you avoid getting into the same situation a few years down the line.

Debt is not necessarily a negative. Using your credit can be a financially responsible choice. However, you should keep the tips above in mind to avoid falling into the debt spiral that can trap so many people.