Debt destroys a person's peace of mind, family happiness and future plans. The first and biggest benefit of getting rid of debt is mental and financial peace of mind (debt relief). When you are not burdened by debt, the money you earn every month is yours. You can save and invest your capital in good deeds.
Acknowledgement and detailed list of your debts
Calculate your total debt. The first rule of getting out of debt is to face reality. Take a paper and pen or create an Excel sheet and write down the following information:
1. Name of the lender (friend, relative, bank, etc.)
2. Total loan amount
3. Interest rate or markup if applicable
4. Minimum Monthly Payment
5. Due Date
Two Best and Most Popular Debt Repayment Strategies
Financial experts recommend two methods as the best for paying off debt. You can choose one of them according to your psychology and financial situation:
Debt Snowball Method
In this method, you list your debts in order of amount owed, from smallest to largest. Interest rates are ignored.
Method: You try to pay off your smallest debt aggressively (by paying off the largest amount) first, while paying only the minimum instalments on all other debts. When the first small debt is paid off, you feel a psychological sense of victory.
Debt Avalanche Method
In this method, you arrange your debts in order of interest rate from highest to lowest.
Method: You focus on the debt with the highest interest rate (such as credit cards). All other debts are paid at the minimum rate. This method saves you money because you pay off the most expensive debt first.
Create a Monthly Budget
It is impossible to get out of debt without a budget. You must know where your money is going. Adopt the world-famous budget principle to control your expenses. Divide your monthly salary into three parts: 50% for necessities, 30% for wants, 20% for savings and debt.
Increase income and reduce expenses.
Stop mobile, internet and cable packages that are not urgently needed.
Prefer home-cooked food instead of eating expensive food from outside.
Ban branded clothes and expensive shopping for some time.
Reduce the use of cars or bikes and think about public transport or fuel sharing.
Ways to increase income:
If you have any digital skills, start freelancing in your free time.
Get instant cash by selling your unused items at home, old mobiles or furniture on internet marketplaces, etc., and pay off your debts.
Consider taking on a part-time job or overtime.
Negotiate with lenders
If you are stuck with a bank loan, go to them. Tell them your financial situation. Often banks waive interest and convert the money into easy instalments, which is called 'debt restructuring' or 'settlement'. And if you have to give a loan to an individual, instead of hiding from them, go and meet them in person, apologise and give them a realistic timeline so that you will definitely return this amount every month. This will maintain your credibility.
Avoid these mistakes that push you into more debt.
Taking another loan to pay off one loan. Even while paying off a loan, make sure you have at least a small amount of money as an emergency. God forbid, if an emergency happens, you don't have to take out another loan. Don't buy expensive things on credit to impress people.
FAQs
What is the fastest way to get out of debt?
The fastest way is to reduce your expenses to a minimum and increase your income through part-time work or freelancing, and then put all that extra money towards paying off your debt. The "debt snowball" method is the most effective strategy.
Can banks reduce the amount of the loan or the interest?
Yes, if you convince the bank that you are truly in financial trouble and are about to default, the bank will often waive the interest and make easy instalments of the principal amount or make a one-time settlement with some discount.
How do I get out of debt if I have no source of income?
In such a case, the first goal should not be to get out of debt but to find a source of income. Start any small business, use one of your skills to work online, or sell unnecessary household items to temporarily pay off some debt.
Is it okay to save when in debt?
It is not wise to make large savings or investments when in debt, because the interest on the loan is higher than the return on your savings. However, be sure to create a small "emergency fund" so that you do not have to borrow more for an unexpected need.
Conclusion
Getting out of debt is not a one-day task; it is a journey that requires patience, discipline and sacrifice. Remember, the first benefit of financial freedom is peace of mind, for which there is no substitute. Calculate your expenses today, choose a plan and take the first step towards your bright debt-free future.