Are your credit card statements lying unopened? Do you have nightmares of having to sell your worldly possessions to repay your debt? Do you spend most of your days pushing your debt problems to the recesses of your mind?
Well, we understand that carrying around a mountain of debt can be both frustrating and tiring. But accepting that you have a debt problem goes a long way in helping you take steps to get out of debt. And once you do come to terms with it, there is no stopping you.
So if you’re feeling a little lost and stressed about getting stuck in debt, here is our six-step guide to help you get out of debt quickly and achieve financial freedom this year:
Step 1: Determine how much debt you have
Yes, this sounds scary, but it is a necessary step to take. How do you go about doing this? Well, open a spreadsheet or put pen to paper and make a list of the following:
· The outstanding balance on each credit card and loan that you have.
· The interest rate for each. (Interest rates on credit products are subject to compounding. And when you don’t pay your bills on time, the amount continues to increase. So, the longer you take to clear your debt, the more you end up paying.)
· The minimum amount you need to pay each month.
Once you have noted these down, arrange the debt in descending order of interest rates. This means that the credit card or loan with the highest interest rate will be prioritised over other credit products when it comes to paying your debt.
If you find that the interest rate is the same across the list, prioritise in terms of the amount you owe. But instead of starting with the highest amount first, start with the lowest.
So, if you owe S$2,000 on one credit card and S$6,000 on the other, you will prioritise paying the S$2,000 debt first. Paying one card completely will give you the motivation to continue working towards clearing other debt. If a significant amount of your credit card debt is due to a cash advance, prioritise clearing that card first. This is because the interest rate on cash advances is always higher than the regular interest rate on your card.
Remember: Don’t get scared and overwhelmed by the amount you owe. Knowing how much you owe and prioritising your debt will help you make the right decision when it comes to making monthly payments.
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Step 2: Determine how much you can afford to pay each month
Now that you know which credit card or loan you will be tackling first, it’s time to figure out how much to pay towards each credit product every month.
How do you do this? First, take into consideration your monthly expenses. (If you don’t already know how much you spend each month, there is no time like the present to start.) Your list should include expenses such as rent, utility bills, installment payments, transport transactions, and the like. It should also include how much you spend on coffee, on eating out, and all other purchases that you make in the month. Basically, each time you spend a dollar, note it down! Try these money apps to help you keep track of your expenses.
Now, unless you have been maintaining a daily expense ledger there is no way you will know how you spent every dollar, so an approximation works as well. Don’t forget to include the minimum amount you owe on all your cards and loans each month.
Next, eliminate unnecessary expenses. The fastest way to get out of debt is to put more money towards paying it and spending less on things you don’t need.
Finally, see how much you have left at the end of the month and put aside at least 30 per cent as savings. The remaining amount you will use to clear your debt.
What happens if your balance is negative, though? If your expenses are more than your income, the next step is something you could take advantage of.