If you are in debt, you can attest that it doesn’t feel very great. You may have tried to pay it off a few times but it can be practically very difficult to clear off debts, especially high-interest debts. But no matter how long you have been owing, debts don’t go anywhere if you don’t pay them off.
Do you want to repay your debts successfully? Have you tried different strategies to repay your debts and become debt-free to no avail? Stick with me because you are about to see expert tips on how to completely pay off your debts and become debt-free from this moment on.
Why You Incur Debts
In trying to understand how to become debt-free, you need to understand why you are incurring debts despite receiving a good salary that should cater to your basic needs.
Sometimes, debts are unavoidable because you have a necessary need that should be met. However, understanding what ‘necessary needs’ are and what they are not will help you avoid falling into the tunnel of debt.
Many people find it hard to repay one debt which might lead them to borrow another debt to pay the first debts. You should avoid this as well as borrowing to finance luxury or non-essential needs in your life.
I once incurred debts when trying to meet certain needs. This was due to my lack of understanding of budgeting, opportunity cost allocations, and good financial management. The moment I saw how this short-term low-interest debt affected me, I immediately adopted some of the following ways to repay and avoid recurring debts.
How to Avoid And Pay Off Debts Quickly
Learning to avoid debts, living within your means, and saving, are some of the best financial decisions one could ever make. One who has no money but has no debts is richer than someone who has a lot of serviceable debts even though they both have nothing on them.
The fear of external debts is the beginning of financial wisdom. Here are some practical ways to avoid debts and live a more fulfilling financial life.
1. Set aside money in your savings
One effective way to avoid borrowing and accumulating high-interest debts is to set aside money in your savings. You may have different goals that you are saving for. You should consider including debt repayment in your savings goal.
Whether you want to save up a large amount of money to pay off your pending debt in one shot or you are striving to have an emergency fund while making interval minimum payments on your debt every month, savings can help you get rid of and avoid debts.
I keep an emergency fund for my business that I can borrow from whenever I have an emergency. Thereafter, I pay it back, oftentimes with some small interest, once I have raised the money from other sources. This way, I don’t have to borrow from high-interest sources out of necessity.
2. Spend less
If you want to avoid debts or pay off your debt quicker, you need to think about spending less regularly. Cut down on unnecessary spending and impulsive purchases. If you are trying to get on top of your finances, you need to track your expenses to know where you are spending too much.
There are many ways you can cut down on your expenses. Maybe you like to eat out a lot, or you have developed a special attachment to a particular fast food or snack. Even sometimes, you may need to cancel subscriptions until you are back on your feet with a zero debt record.
Think about it as the sacrifice you need to pay until you achieve financial freedom. If you truly want to avoid debt or pay off your debt, staying determined to spend less is something you should have to do.
3. Create a realistic budget
For anyone who is seeking to pay off his/her debt, creating a budget is a must. While making and implementing a budget is something you may already be doing every month, if you are still dealing with debt, it could be time to get a bit more immersive with your budgeting.
One common budgeting mistake a lot of people make is allocating too high proportions to savings or debt repayment. Instead of trying to go all out with your finances, you should get realistic with your ability to pay off your debt and save money.
Whereas your capacity to save and repay debt may not be as much as you want from the start, as you start making progress consistently, and start getting used to spending less, soon it will start becoming easier for you to set aside more for your savings and debt repayment plan.
4. Professionally manage your money
If you want to be confident that you’re doing your best with your finances, it doesn’t hurt to work with accountants who know the best tricks and ways to manage money expertly. There are also financial software that can help you out.
For example, Intuit Accountants offers you expert financial management and tax advisory insights which can help you see areas where you could maximize your finances. If you are having a difficult time managing your finances, professional help could be highly needed in taking you out of debt.
5. Avoid incurring more
This is one common mistake many people make, and it is often due to poor money habits or because the individual is still trying to keep up with a lifestyle that their income can no longer maintain.
You should also avoid borrowing new high-interest loans to pay off another high-interest debt as this can make you drown in debt. Rather, you should plan to gradually pay up your existing debt with what you have. Get stricter with your spending habits and consider what you can do better to be able to pay off your existing debt.
How to Create a Debt Repayment Plan
To be able to efficiently pay off your debt, you need to have a concrete plan and strategy. And if you are struggling with making such a plan, here is how you can make a debt repayment plan.
1. Access your financial situation
You might have an idea of your total income and debt in your head, but when trying to make a debt repayment plan, you need to get clear on paper. Calculate and document your total debt, monthly income, expenses, and available money for debt repayment. Knowing your financial situation is the first and most important step in making any financial plan.
2. Choose a repayment strategy
There are three methods/strategies you could choose from in this aspect – Debt Snowballing method, Debt Avalanche method, or Debt Consolidation method.
In the debt snowballing method, you focus on paying off the smallest debts while making minimum payments on all the other debts. Once the smallest debt is paid off, you can move on to the next smallest. This method provides quick wins and higher motivation.
On the other hand, the debt avalanche method involves paying off the debt with the highest interest rate while making minimum payments on all other debts. This method saves you the most money on interest in the long run.
The debt consolidation method allows you to wisely consolidate multiple debts into a single loan with a lower interest rate. By taking a single lower interest rate to pay off multiple high-interest debts, debt consolidation helps you see your debt more clearly and can reduce your total interest paid eventually.
3. Create a budget
After you have assessed your financial situation and chosen a debt repayment strategy, you need to create a budget based on your current or expected income. Focus on tracking your expenses and identify areas where you can cut down your spending, as well as apportion some parts to debt repayment. The 50-30-20 rule could be helpful.
4. Negotiate with creditors
When the interest gets too big, it might be right to contact your creditors and request a lower interest rate. Some creditors may agree to lower the interest rate or pause the interest for you. In some cases, creditors may agree to a lump sum payment for less than the full amount owed.
5. Automate payments
Once you have gotten your repayment plans ready, you can consider automating your debt repayment monthly to ensure they are made on time. This can prevent you from failing to pay or not doing so on time until you fully come out of the debt(s).
6. Track your progress and re-evaluate
A financial plan is not complete until re-evaluation is included. Constantly track your progress to see where you can readjust your plans or re-strategize.
As you regularly monitor your progress, don’t forget to celebrate small wins. It can motivate you to do even more.
Final words
If you want to make big advances in getting rid of debt, you need to have a concrete plan. This post has shown you how to reduce debts and how to efficiently make a debt repayment plan.
You should also consider seeking professional assistance such as consulting a credit counseling agency or debt management plan (DMP) agency. These can help you determine which debt repayment strategy is best for you.
Lastly, you should be flexible with budgeting tools that allow you to have a better view of your finances and how to manage them.
