How To Get Out Of Debt

Q: My query was is there a way i can get back to my finacial freedom after i took a loan with Barclays bank and currently paying through the nose with the big interest.also this has lead me to bad credit and i am always in a debit account so getting a top up is impossible.please advise. thanks

As I see it, there is no set path to come out of debt, everyone’s case is different. They key is proper financial management. If one has good money managing habits, they can theoretically get out of debt with ease.

There are two paths here:

1. Income + Borrowing + Spending both = DEBT
2. Income + Saving + Investment = WEALTH

Unfortunately, many many people follow the fist path. It is not fair to blame them though – we are only human and our wants can sometimes take control of our emotions and end up in us making wrong financial/money decisions….

So how does one go about getting out of debt? Here’s one plan. Kindly note that it is not the only way and there may be better methods out there.

First, take a piece of paper and list down all your sources of income (things that put money in your pocket every month). Next, list all your expenses (things that take money out of your pocket), including what you need to pay every month to service your loan(s).

If the total income is higher than the expenses, that’s super! Otherwise, you are in the red and things will only get worse unless you take control now. But how? First, do not get any further into debt!

Next, You MUST reduce your expenses (or increase your income!) so that you can comfortably pay your bills every month without accumulating more debt. Try your best and cut down on everything that is not an absolute necessity – make sure that you only pay what you absolutely MUST pay. If you can move somewhere where the rent is cheaper, do so; if you can cut down on your monthly bills, do so; if you spend money on anything that you don’t need to survive, stop that. Cut down your expenses brutally.

Doing this will make you able to service your loan. If, after you reduce your expenses, you find that your income is now higher than your expenses, put the surplus into paying off your debt. In fact, pour any spare money into the repayment of the debt. Think of the debt as a drain on your money – if you pay it off, you will have money to spend on other things. Put all your disposable income into paying off the debt until it is gone. If you have a savings account with money – consider using it to pay off your debt. Think of it this way: why earn 1 – 5% interest on your savings account when you have a loan that you pay at 18%? Use your savings to reduce the debt.

If you have more than one debt/loan that you need to pay, then you need to list them down and compare them. Which has the highest interest rate? Pay that one off first. You can do this: pay the minimum amount on the other debts/loans while focusing the rest of your money on the one with higher interest. Once you finish it off, move to the next highest interest rate debt/loan. Keep doing this until you pay off all your debt.

And when it is gone, then follow path two – which leads to wealth.

Basically, do as much as possible to acquire Assets while avoiding Liabilities. We can define assets as things that put money into your pocket and Liabilities as things that take money out of your pocket. For example, unless your are a taxi driver, buying a car is, in effect, buying a liability . Imagine that – who ever goes out of her way to buy a liability?

Income + Saving + Investment = WEALTH

Photo courtesy of alancleaver_2000.