Everyone wants to be debt free. Unfortunately, it’s not easy to get out of.
Having outstanding debts feels like I am a slave of money. It sucks having debt especially those with high interest rates.
Although getting loans will be useful for reaching the other stages of wealth, it is advisable that I get rid of those high interest yielding debts out of the way first. These could be personal loan, car loan, student loan, and credit cards.
Obviously, the only good way to get out of debt is by paying them off.
But what if I can’t pay them off at once due to my income constraints? Then I pay them in installment. Paying debts in installment will incur interest expense.
I can simply pay the minimum amount, but that would really take me a long time and I get to pay more in interests.
So as much as possible, I pay the maximum amount that I can.
Does this mean that I should always avoid acquiring these loans? Not really. The key here is to manage my debts.
I would like to share in this post 10 ways that we can get out of debts faster. I’ve tried most of it personally. And YES YOU CAN do these too.
1. Pay more than the minimum and pay as much as you can
On top of the minimum monthly payment, it would get us out of debt faster by adding payments to the minimum.
Additional payments will be deducted to the principal driving down the interest expense for the next period.
Note that this is most effective and useful for debts that are a) high interest and b) loans with no fixed payment schedule. Most common example of these kinds of debts is the CREDIT CARD.
2. Look for other earned income or profit income
One of the best ways to get out of debts is by increasing the money going in.
It’s best to look for side hustles or sell something.
Read more on 7 types of income
3. Use bonuses to pay off debts
When we receive bonuses, it’s tempting to buy something to reward ourselves for doing a good job.
But hold on to your money yet.
Instead of buying yourself a reward, why not pay your debts first?
This will reduce your debt principal further down.
4. Cut your expenses
With a lot of expense types, there would surely be one or 2 that we can reduce.
Best if we can avoid expenses that are not even necessary to survive.
I found out that eating out was the most expensive for me, yet I can live without, so I decided to stick to a small budget for it. I still gave it a small budget just in case I meet or catch up with an old friend. I saved up 15% of my current expenses just for this.
Read more on 19 types of expenses
5. Budget your cash flow
Budget your cash flow to make sure you will have enough money up to the next payday and to make sure you can face the bumpy roads ahead. Rest of the money should be used to make additional payments on your debts.
Read more on cash flow budgeting
If you have children, it is hard to say no to them. And when we spend for them, it is usually a huge chunk of our money.
Discuss your budget with your children. They should already be learning how to manage money, so it won’t be a problem when they start earning their own. Discussing finance should not be a taboo in the family anymore.
I personally believe that kids should be taught about money even as a kid as this is the reality. It is what I wished I had learned earlier in life.
Another thing is once they understand your financial situation, they would not ask for more than what parents have.
Also, learn to say no.
6. Do not invest yet
Another common mistake I see people do is investing while they still have debt.
I’m not saying that investing is bad, it’s just that cost of debt is usually higher than the return on invest.
Say my interest rate for debt 3.5% monthly and my investments on stocks will give me 1.5% of my stock value in cash dividend in 3 months. I would already have lost 2% in the process. What more if I add the withholding tax, usually 20%, that will be reduced from my cash dividend? I will only receive 1.2% so then I incurred a net difference of 2.3%.
Debt is usually more costly than investment returns. This is another reason why we must be debt-free first before going to other stages of wealth.
Unless the rate of return is higher than the interest expense, do not invest yet.
Read more on 8 stages of wealth
7. Stop adding more unnecessary debts
These unnecessary debts will incur interest which makes them more costly.
For this, we need to delay self-gratification and stick to the plan.
8. Consider Loan consolidation or Balance transfer
Aside from paying debts faster, these are options to delay and get lower interest rates and save money from finance charges.
You may get personal loan with lower interest rates to pay off the balance of your currently high interest.
You may also consider balance transfer from one credit card to another.
9. Ask the creditors for lower interest rate
YES, this is an option. You may negotiate a lower interest rate and even a settlement to cut this all at once.
The worst-case scenario is if the bank says “no”.
I wouldn’t consider loan consolidation, balance transfer and negotiating a good move as they might reduce your credit score. You will need a good credit score in later stages of wealth. But hey, it does the job of getting you out of debt faster.
10. Use debt snowball chart
We started this list of strategies with “paying more than the minimum” and we’ll end it with debt snowball chart.
Debt snowball chart is known for debt-free planning strategy.
With all the ways discussed above, it will be easier if we can use a tool to plan our payments and see how much time and money we can save.
I made an Excel template that YES YOU CAN also use. It is already complete with formula and functions, you will only need to input your loan details.
I spent a lot of time and effort on my templates and I hope you enjoy it. Making your own formula would surely take up so much of your time. Please check out my Fiverr Gig to order the template.
Getting out of debt is no easy task combined with self-discipline. The 10 ways listed above would be most useful when combined with other strategies.