penny wise
Steps to Get Out Of Debt
In my opinion, one of the most stressful situations to be in is being in debt. Whatever your circumstances maybe, if you have taken a loan you know you have to pay it back. Borrowing and not paying back is a criminal and moral offense, be it from a friend/relative or a bank. It is an obligation and needs to be fulfilled despite whatever situation you may be in.
Sometimes, you can be in debt because you have spent too much money on a holiday, buying expensive things or living beyond your means. There are many people who try to get out of debt, but they are unable to because their financial situation does not allow them. At the same time, there are others who get out of debt simply because they have better managed finances.
As I have mentioned several times in some of my previous articles, if you want financial freedom you need to have a plan in place to enable you to tackle debts. We all need loans sometime or the other, but it is equally important to consider your ability to pay it back before taking one!
Here are a few steps to help you get rid of your debts:
DO NOT BORROW MONEY UNLESS YOU REALLY NEED TO
Refrain from taking a loan to fund your lifestyle. This means avoiding overspending on your credit cards at home or abroad. I have to admit, I myself fell into the credit card trap on a recent visit overseas. On my return, I realised I had spent way too much on things that I could have done without.
Do not take a loan to buy a brand new expensive car unless your financial situation allows you to pay upfront or in instalments.
An important point is to never ever seek a loan unless you have paid off the previous one completely. Pay all your credit card bills after a trip before embarking on another one. When the credit card bill mounts up unusually due to travel or some emergency payments, it is usually possible to obtain a loan from your bank to pay back the credit card debt (at punitive rate of interest). The loan is then recovered by the bank in equal instalments from your account.
OPEN AN EMERGENCY FUND ACCOUNT
It is always advisable to open an Emergency Account. Keep funding this account with whatever surplus money you may have saved and do not touch it unless you really have to. Make a budget of your income and expenses; this is a good way of tracking where you stand with your finances, whether you have surplus funds or if you were in deficit. Always try and ensure you have surplus funds to take care of debts that may occur. If you are in deficit, do not even think of taking a loan till the account is in a positive again.
MAKE A LIST OF YOUR DEBTS
If you have more than one debt, list them accordingly. Start paying off the highest interest rate credit card debt and end with the debt with the lowest interest rate. This makes most sense because you would save the most money in interest over time. Stick to the plan of paying off and you will get there despite the time it may take.
EXCESS CASH SHOULD BE USED TO TACKLE DEBT
There could be times when you may receive cash gifts for your birthday, anniversary, Eid, etc. from your loved ones. Please remember not to waste this money on shopping, a visit to the parlour etc. Instead, use it to bring down your debt. The more money you set aside towards your debt, the sooner it would be off your head.