Wouldn’t it be great if there was a magic formula that made debt melt away with very little effort? Or if you could win the lotto?
Everyone has quick-fix fantasies. But if you’re waiting around to be rescued, you’re probably not doing the very thing that will make a difference: taking responsibility for your own financial situation.
Working to pay off debt makes us feel more capable of handling our money. It also actively helps us transform the patterns of thinking and behaviour that got us into debt in the first place. So we not only get out of debt, we stay out.
Often we know we’re spending money we don’t have, but we choose to ignore it. We decide to buy now and worry later.
So how do you make getting out of debt more than wishful thinking?
The beginning of financial transformation starts with arresting the denial. Look at what you are spending, when and why.
Figure out how much money coming is in and how you are using it. A budget or spending plan is essentially working out how to use your money so it supports your priorities and values. It will help you to see how you can free up more money to pay off your debts.
Select a strategy
Some people prefer the Snowball method for paying off multiple debts; others favour the Avalanche method. Debt consolidation has its fans too. So how do you decide which is best for you?
The Avalanche method
This is where you tackle the debt with the highest interest rate first. Why? Debts with a higher interest rate grow faster because of the effect of compounding interest. So paying these debts first should save you money in the long-run.
The Snowball method
This starts with paying off the smallest debt first, then tackling larger and larger ones. Why? Paying off one debt quickly creates a sense of positive momentum and encourages you to keep going.
At this time of year many financial institutions present balance transfer offers or personal loans as a way out of debt. A balance transfer offer – such as zero per cent for 24 months – stops interest accumulating on your credit cards giving you space to make inroads into debt repayment. Likewise, consolidating debts into a personal loan or home loan can reduce the interest being paid.
Get set for success
Reduce wriggle room by cancelling and cutting up credit cards and don’t wait to see what’s left in your bank account at the end of the pay cycle. Set up an automatic transfer to your debt, ideally of more than the minimum repayment.
Work out your target
Your target shouldn’t necessarily be the sum of your debts. Having a goal beyond your debts can put a more positive spin on a decision to get rid of debt.
If getting free of debt is going to take years, be sure to reward yourself along the way.
Another alternative is to include some money for fun in your spending plan and don’t beat yourself up if you fall off the wagon occasionally.
Call in the support crew
Sticking to a get-out-of-debt plan is easier if someone is there to support you along the way. Get the support of a financial planner, a friend or family member.
- Understand how you got into debt
- Set a spending plan
- Select a debt repayment strategy
- Have a goal beyond debt repayment
- Automate success and build in rewards
- Get support
- Attack the mountain in small steps