7 amazing tips to break free from debt
In the previous article, the focus was on education inflation and its impact on our savings. This article will discuss how to break free from debt?
Debt, this dreaded four-letter word, is a nightmare for most people. However, everyone has a debt of some kind, whether credit card debt, student debt, home mortgage, personal debt or more.
Debt is an unavoidable part of life. Dealing with debt often leads to stress and anxiety and can impact your physical health. There are both good debts and bad debts. The debt that creates a valuable asset (tangible or intangible) for you is good debt.
Debt that keeps on exerting negative pressure on paying off is known as bad debt. You need to remove this bad debt to live a stress-free life.
How do you break free from debt?
Here is a step-wise guide to help you break the vicious cycle:
- Assess your situation: To get out of the debt trap, you must know where you stand. Check all your accounts and add up your liabilities (all types) to know how much you owe and to whom. Calculate your net worth by subtracting your liabilities from your assets. This will help you know your worth on paper.
- Know where you spent your money: It is important to categorize your expenses into housing, transport, food, travel, miscellaneous, and debt. An example of a bad monthly budget is where the debt is almost equivalent to income. You need to get your basics of spending right as your first step.
- Improve your budget: When you don’t follow the rule “Spend less than you earn” that’s how your debt problem arises. Living below your means is a very important thing that one should take care of to avoid getting into a debt cycle or when trying to get out of it. Unless you manage to spend less than you earn, you will always be in debt and never be able to come out of it.
- Pay off your high-interest debt in full every month: Your credit card bills keep on mounting because you do not pay them in full every month. It happens because you take on more interest-bearing debt than you can manage. Paying off your credit card bills and other debts very religiously every month will do good for your credit score and will be a good step to lighten your debt burden.
Some effective ways to reduce your debt
- Use the snowball effect: Start paying off your small debts and then tackle the bigger ones. Put as much money towards paying that one small debt, and once it is done with, the free money from that shall go to the next big one. As you proceed with wiping out debt, the amount going to the current payment will increase. Another way is to tackle the highest interest debts first (to save on interest payments) and proceed.
- Pay more than the minimum amount: You pay both the principal and the interest when paying down debt. So, paying more than the minimum for a particular month means cutting the principle for the next month and thus, saving money on interest payments.
- Increase your income: An increase in your income will solve half your debt problems if you know how to channel your money. An increased income from the same work or a new income from a different income source will leave more money in your hands to get out of that unwanted debt you are in. You have to help yourself in this regard.