NAIROBI, Kenya, Mar 23 – A year after the coronavirus pandemic struck worldwide, many people are still grappling with its impact, which includes loss of jobs and reduced incomes.
As such, many people have had to result to taking up debt, in order to make ends meet.
But in order to gain financial freedom, the first thing one needs to do is to pay off debt. Below are steps one can take to get out of debt, according to financial experts.
List all your debt
According to a report filed by CNBC, the first step to any debt payoff plan is to understand how much debt you have.
List all the debts you owe, whether revolving loans or installments loans.
The website recommends the use of budgeting tools such as Personal Capital to get you started.
Write down how much you make to see how much can be used to pay off debt
The financial experts also urge people seeking to pay off their debt to make a list of their essential expenses (needs, not wants). This includes housing, utilities, food, transportation and the minimum monthly payments on all your bills.
“You can pull your year-end credit card statement and/or checking account statements to see how you’re spending broke down over the past year.”
This will give you a chance to know the minimum payments you can make on all of your debt balances each month. This can be separate from your baseline budget, but it will be a non-negotiable portion of your monthly spending.
Pick a payment plan that will suit you best
There are two popular ways of attacking debt – the snowball method and the avalanche method, which both have their pros and cons.
Financial experts define the snowball method as a method that makes you focus on paying off the smallest balance first.
Renowned financial expert Dave Ramsey recommends this method, arguing it is a good plan because you can get a win early on and then stay motivated to pay off the rest of your balances.
The avalanche method works differently; you start with the repayment of the highest debt first. According to the report by CNBC, with this method, you will likely save some money in the long run because you’re prioritizing balances with higher interest rates.
Reduce your spending
Once you have identified which method you want to use to pay off your debt, it is important to cut down your spending habits in order to hit your target.
Experts from This Is Money UK say that cutting down on non-essential spending could help you tackle debt quicker.
According to the experts, every pound you can save is an extra pound you can put towards reducing your debts.
For instance, cut down on shop-bought coffees or that beer after work and make your own packed lunch rather than buying expensive shop-bought sandwiches.
“It may sound a bit mundane, but the savings can soon add up – try it for just one month and write down how much you save.”
Re-think your daily habits
To get out of debt, Ramsey advises people to make small changes that end up saving you a lot of money that could be used to repay debt.
For instance, he urges people to plan their grocery trips.
“Make a list and stick to it! Use the calculator app on your phone while you browse the aisles to make sure you’re sticking to your budget. Do impulse items always end up in your cart? Try ordering your groceries online and then picking them up curbside at the store.”
He also urges debt payers to ensure they avoid expensive hobbies. “Do you really have $200 a month to spend on golf? Are you serious?”
Lastly, Ramsey asks those interested in repaying their debt to ditch the gym membership. “You can still go for a run outside—for free. Gather some friends and start a running club. Or do those fancy HIIT workouts at your local park.”
All the saved money could be used to repay your debt and get you a step closer to financial freedom.
What other tips are you using to get out of debt this year? Tell us in the comments.
