Debt: The one thing that we all dread. All people desire financial freedom, but very few people achieve their goal. Poor money management is the greatest problem especially when it comes to debt- bad debt. To most people debt is a way of life. The basic definition of debt is money borrowed by one person from another. Under this definition, debt is never bad or good. But, there are two types of debts bad and good. Bad debt is money that can’t be recovered. Good debt helps you to make money.
You can’t live without good debt as that is how you will get ahead. For you to become financially free, you have to learn how to pay off your bad debts stay free of them. Bad debt is money that you borrow and buy luxuries like clothes, cars, go for vacations, jewelry, etc.
To eliminate bad debt, there are two things that you need to do; limit your expenses and have a formula for debt repayment. Everyone has a formula for paying off the debt. Below are six steps that you can use.
Take note; this may not apply to everyone. This is just the formula I used to pay off my bad debts.
Stop accumulating debt:
The first step for is to stop accumulating debt. When you notice that you have dug yourself into a hole, you STOP digging.
- You need to limit your expense. This means being frugal. Most people think that frugality is a bad thing. But, if you are to succeed in getting out of debt, you need to be economical. Take an inventory of your expenses and then try to eliminate the expenses that you can leave without. Write down belt-tightening measures that are going to save you money each month. Commit to this process as your life depends on it.
- Never shop on impulse. Shopping on impulse is what makes people get into debt. You need to control your desires.
- Delayed gratification. If you seek short-term gratification, you will pay for it in the long-term. Never purchase the luxuries with a credit you will only be digging yourself deeper into debt.
Take account of your debts
You cannot work on something you do not know. So, you need to take account of your debts. This is the toughest part because you will have to be true to yourself. You also need to indicate the amount of money that you owe. Make sure that you also write down how long it will take.
- Credit card debt amounting to $2,000 with a minimum payment of $200. That means it will take you eight months to completely pay off the debt.
- Your school loan amounting to $3,000 with a minimum payment of $300. It will take you ten months to complete the payment
You need to list all the debt including the ones you owe to your friends and family. They may not require the money back, but, by paying off your friends will help you develop self-discipline.
Start paying off your debt
Once you have made your list, you need to start paying off the debt with the least number of months. If you pay off the debt, it will motivate you.
Move on to the next debt
Take the next debt with the least number of months and pay it off. Here is the tricky part; take the money from the first debt and add to this new debt. For example, take the first $200 you were paying and add $300. In total, you will be paying $500. This means that instead of taking ten months, your second loan will take you six months instead of ten months.
Find an alternative income generating channel
It is important for you to find an alternative source of income. It doesn’t have to be something time-consuming. A part-time side gig is perfect for you. The idea is to raise an extra amount of money, $50 to $100. The extra cash is to be used for your debt repayment. It will help you to pay the debt faster than you anticipated.
Most people don’t pay themselves, but by not doing so you will not be motivated. It makes sense to pay your debts first. However, if you don’t develop the discipline of paying yourself first, you will not be motivated to pay off your debts. Motivated you ask? Yes. When you pay yourself first, the pressure to pay off your creditors will make you come up with different solutions for paying them off.
To pay off yourself, you need to start small. Take three piggy banks; one for saving, investing and tithing then take 30% or the amount you are comfortable with from your income and put into the piggy banks i.e., 10 % in the three banks. After every month, deposit the money into your savings account and investment account. The tithing money, give it away to your favorite charity or church.
If you cannot pay yourself first: Pay off the debt that is stressing you. Once you have stabilized, start paying yourself.
Paying yourself will help you to develop self-discipline.
Design your own formula
This is an example of what you can do to pay off your debt. If you are uncomfortable with bad debt, you have to work hard to pay it off. Frugality is encouraged for the first few months. Limit your expenses.