With debts looming and bills piling up, it can seem impossible to get out of debt. Making only minimum payments may seem easier, but it could trap you in debt for so long. It could take you months, if not years, to get yourself out of that hole. Being in debt can be overwhelming, but you don’t have to allow yourself to succumb to that misery.
You can easily get out of debt by adjusting your budget, consolidating your debts, just to name a few. Read on to learn ways to get out of the debt trap and put your debt worries at bay.
- Make a higher payment than the minimum amount required.
Increasing the minimum payment will lower the interest rates, and you’ll also find yourself out of debt faster.
Suppose you have a credit card balance of Rs. 15,000 with an interest rate of 17% APR and you make a minimum payment of Rs. 450 each month. It will take nearly four years to pay the debt. The interest rate accrued will be around Rs. 5,500 in total.
If you pay Rs. 550 every month or Rs. 650, you will finish the debt in less than three years with an interest amount of Rs. 4100.
Taking the initiative to pay more than your minimum bill each month is a great way to work towards getting out of the debt trap. Making this extra payment before its due date will help decrease your principal balance faster.
- Pay all smaller debts first (debt snowball)
If you’re ready to get out of debt, the snowball method can be a great technique. This debt repayment method entails paying the smallest debt first. Here is where you deal with the smallest debt till you finish and move on to the other. Allocate as much as you can towards this debt to repay it faster.
Let’s say there are two types of debts you have to pay. One is a credit balance of Rs. 7,000 and a student loan of Rs. 15,000. You can apply the snowball method, where you pay the smaller debt first which is a credit balance since it has a lower balance.
Therefore, the debt snowball method is made to help tackle one financial obligation at a time, allowing you to build momentum and be on the right track. However, if your debts come from payday loans with sky-high interest rates ranging from 300% to 400% APR, you should pay it first.
The debt snowball method is a surefire way to see quick progress with your debts. All you have to do is arrange them, starting with the smallest debt. Then make the payments on all of them, and allocate extra funds towards paying off the next smallest loan.
- Re-adjust your budget
Another strategy worth considering is to adjust your budget again. Honestly, getting a part-time job besides your main job can be tiring; but sometimes you have no option. Before you start repaying debts, assess your budget and make necessary adjustments. Cut off any unnecessary expenses and use those funds to repay your debts.
Classify them in two categories, either need or want, as you highlight those expenses to be removed or reduced. Once all is done, use those extra funds for debt repayment.
Making small changes to your budget can help you notice what expense you’re wasting money on. Of course, you will use those funds to pay off debt. This could be the trick to get you out of the debt trap, thus saving you from stress and worry.
- Manage all your expenses the right way
How much are you spending per month? It is ideal to track your finances and see how much goes to cover expenses. You will need to do some work though. Get the bank statement for the last six months or credit card statements. After that, optimize your expenses by eliminating some regular expenses that are useless to you. Also, you can change your lifestyle slightly and look for other cheaper options. For instance, you can buy a cheaper phone capable of servicing you like an expensive one would. This could help you save a lot.
- Don’t take too many loans
Too much debt can be a burden, both on your mental and financial health. Ensure the expenses ensure you don’t suffer from the burden of debt; your monthly expenses should be less than your total income. It should be below 40% of your total income. Exceeding this cap means you will put yourself in a tight situation.
- Go for debt consolidation
If you have multiple high-interest debts, taking out debt consolidation loans may be one of the ways to get out. Combining pending loans into one new loan can help reduce overall interest costs and create more manageable EMIs and terms that better suit your needs.
To Sum Up
Breaking the debt bondage isn’t a child’s play. It can be really challenging. But with the strategies mentioned above, you are sure to start making strides to get out of the debt trap. This could help improve your financial well-being. But, first understand why you got into debt, then change your behaviors to not fall into the debt trap again.