First world countries seem to love debt. Statistically we have a lot of it from the governments to businesses right down to teens with credit cards! I avoid debt although currently I do have a little and it does my head in.
With most cases I see or am asked for advice on, it is consumer debt that has gone crazy. We buy something to make ourselves feel better, we buy stuff as a celebration, we spend up all the time and without much effort I know many couples who owe $20,000 to $100,000 with nothing to show except 'stuff' collecting dust in their homes.
If you had excessive debt, how far are you willing to go to pay it off?
Me, I hate any debt so am willing to do pretty much anything (within reason!) to clear it. When I say within reason, I won't do anything that goes against my morals. What would you be willing to sacrifice or sell, what extra work would you take on to pay off your debt?
Since I do have some and I hate it, here are the steps I am taking to pay off my debt
Step 1 - Get real with the debt
Add up all debt, where it comes from, what it was for, what the interest rate is, repayments on it and how long you are locked in for. List everything - credit cards, personal loans, car loans, loans from friends or family.
Step 2 - Work out which to pay off first
I don't have loads of debts, so this is easy for me. Which one you pay off first is up to you. Some find the method of paying off the smallest debt first works best for them, others work on the one with the highest interest rate.
As each debt is paid off roll the payments you were making on that debt into your next one plus any extra payments you were making to help you clear the next debt. This is called debt snowballing.
Step 3 - Work out your budget
If you don't already have a budget, you should. How are you spending you money? What income is coming in? Where can you cut back? Be realistic about what you are currently spending and account for all your income.
Step 4 - Set a time frame
Knowing your budget and repayments you can now see how long it will take you to repay your debt. Set a timeframe for each a little shorter than anticipated. For example, if with your current payments and budget it would take you 12 months to pay off one debt, set your goal at 10 months, then find ways to reduce expenses and increase your income to bring it down to 10 months.
Step 5 - Look at ways to cut back
Go over your budget with a fine tooth comb and start implementing ways you can cut back. For example, can you forage for food, barter, do meal swaps or start growing some food from scraps such as herbs and spring onions.
With this part, I tend to do a pantry clean out and work out a stack of meals I can make based on what we have so I needn't do groceries for a while. Then I get really strict on meal planning and shopping. I look at ways to stretch meals further, find free food etc.
After food, I look at our transport, electricity, compare insurances, look at what I can DIY again if I have stopped doing some of that. Every area of my budget gets scrutinised.
Step 6 - Realise it isn't forever
Think about what you can give up for the period of time it'll take to repay the debt at least. The aim is to never be in this debt again, so you don't want to go back to the way you were before starting to pay off your debt, because it is those habits that got you into this mess in the first place. However, sometimes thinking you are giving up something permanently can be difficult and make it harder to pay down the debt or give things up. This way, you have a timeframe and if at the end of paying off the debt you really want to incorporate somethings back into your lifestyle, you can work out an affordable way to do that.
Step 7 - Make more money
Getting a raise isn't always realistic (but it often isn't unreasonable to ask, provided you pick you timing well), so what other ways can you bring in money?
Take on another job? Pizza delivery, cleaning, gardening, packing shelves at night, working the check out, petrol stations, any job that has out of usual business hours will help you pay down debt.
Do a side hustle like babysitting, cleaning, ironing, selling books, make things to sell, catalogue run or paper route.
Look at one off options such as market research, donating hair, selling things you own etc.
Look at irregular options such as modelling and voiceovers
Start a side business yourself such as blogging, running workshops, importing something to sell.
Step 8 - Get an emergency fund
One thing we often find when trying to pay down debt is that we pay a little off, then something happens like all our tyres blow or there is a health issue and we end up spending on the credit card again.
Try to save $1,000 - $2,000 in an emergency fund fast. As soon as you have that, redirect all your extra funds to paying off the debt.
Step 9 - Throw all extra money at debt
Any money you save or extra money you make pay off the debt, even if it is only $1.05 saved at groceries, throw it on your debt to get it down. All those small amounts add up.
Step 10 - Change your mindset
Don’t view yourself as poor or broke or sacrificing your lifestyle. Change your mindset to that of someone who wants to be financially free and is taking the steps to do so. A broke mindset is depressing and often makes repaying debt harder. Having a positive mindset of one where you are taking control of your finances to give yourself a financially free lifestyle is empowering and more likely to help you succeed.
What tips do you have for paying off debt?