I hope you are not trapped in debts very badly. I know the feelings of being trapped in multiple debts. It’s common and stressful to be in this debt situation. Hence, I decided to write about how anyone can get out of debt situation step by step and get the control of their own personal finance and further they achieve more important goals.
This is a very common problem in general. What steps you can take to get out of this situation? before going there, we must understand what kind of debts are there?
Debts can be categorized in multiple ways, but I would like to go with simpler list.
- Credit card bills
- Home Loans
- Any other mortgages
- Auto Loans
- Personal Loans
- Student Loans
From above list of debts, each and every debt has different terms and conditions so you must understand them before executing this plan. If you are able to execute plan with consistency and persistence, you will feel very confident, and you will be able to take more wise decisions about your personal finances.
Resolve Credit Card Bills and Stop using
As a first step, I would suggest resolving your credit card bills. Let’s understand why.
Suppose you have couple of credit cards and today on Amazon, you see a very great deal on a smartphone which you like a most or probably a dream and even though you already have one mobile which is working fine, you are most likely to buy that smartphone as you do not have to pay upfront, and you also get EMI options using credit cards.
Opposite you do not have credit card, you have to make full payment from your bank account, and hence you may become more reluctant to buy. This is just one example, there are many expenses you can avoid if you do not have credit cards.
You will always feel under pressure when there is a bill to be payed for whole month’s expenses.
Solution – Break the cycle of paying credit card bills by slowly making transactions using direct bank account instead of credit cards. Once your Credit Card is completely paid off, stop using them completely. I know it will take sometimes, but you got to do it.
Benefits –
- It will help you a lot in reducing stress.
- You will get control on your spendings.
- It will help you to increase your credit scores as well.
Pay off loans with highest interest
This is next and recursive step for you where you will have to prepare the loans list and sort them by higher interest rates to lower. You have to target each loan one by one from top to bottom.
Suppose you have personal loan then there are very high chance that may be on top of the list. With higher rate, you might be paying very less principal amount and paying more interest. So, targeting that loan makes sense a lot.
If you are able to pay off first one, then do not stop there and start paying off next loans one by one.
Solution –
- Suppose you get bonus or any surplus money you left with in a month, you must start paying additional EMIs and pay off that first costly loan as fast as possible.
- If your loan type doesn’t support pre-payment, then you must transfer that loan to more flexible personal loans where you can do pre-payment without any penalties.
- As you do not have any credit-card bills anymore, you have lot more control on spending and hence you must be able to save some money and that will be used to pay loans faster.
- If you are not having enough income to tackle this situation, you must start doing some part time work. I will write an article about what you can do to earn more money in your extra time. That extra money will help you to pay your debts faster.
Benefits –
- You will be left with less debt and now you will be left with enough money due to lesser EMI
- As this is recursive process, as each interation is completed, you will keep getting confident.
- With each iteration, you will be left with more money from your income.
- You will be able to invest some money after each iteration for your other financial goals. Learn about SMART financial goals.
If you have never invested, as next step, you can start your investment journey because you are completely debt free now. You can go through another article about investing – investing for Beginners: How to Avoid Common Mistakes & Grow Your Money
Example –
Suppose Hardik is in debt situation. Following are the debts currently he is in.
Credit Cards – 2
- First – 10000 per month
- Second – 5000 per month
Personal Loan – 2
- Smartphone – 2000 per month – 24 months
- Refrigerator – 1000 per month – 24 months
Auto Loan – 1
- Bike – 2000 per month for 60 months
Home Loan – 1
- Home – 10000 per month for 300 months
Your monthly EMIs – 30000 per month
Your other expenses – 2000 per month which you cannot spend using credit cards.
Scenario – 1
Salary – 35000 per month
Remaining balance every month – 35000 – 32000 = 3000 per month
As you have enough income to stop using credit cards, once you stop using credit cards, you may be spending less money per month from 17000 to 15000(Assumed it can be lesser or higher). This can be done instantly from day zero.
After first step, you will be saving 5000 per month. As personal loans are not prepayable, you can create a SMART goal to build enough money by saving money and putting in one account to pay smaller personal loan first which is Refrigerator one.
you need to pay 24000 including interest. So, you can make a smart goal of 4 months to save 20000 by saving 5000 every month and pay that at the end of 4 months.
After 4 months, you will have 6000 per month extra money. We can take the second personal loan of 2000 * 24 = 48000 and at this time, you have already paid 8000 so you will have to pay remaining 40000.
Again, you make another SMART goal of 5 months saving 30000 by contributing 6000 per month. After 5 months, you will have already paid 10000 by EMIs and now you can completely pay of remaining 30k. Hence you will be left with no personal loans now.
After around 9 months of time, assuming you have same salary, you must be saving 8000 per month now.
Now you will feel lot more confident at this time and you have more control of your personal finance. You must start thinking of emergency funds by saving partial money from 8000 and remaining money can be used to create another SMART goal to finish off bike loan.
Finally, Home loan is completely different topic, as it helps to reduce the income tax. There are multiple ways to look at it so, we can definitely have different article about home loan in detail.
Scenario – 2
Your income is lesser than your total expenses then you must start working on side hustle and start earning extra money and then you will fall in to first scenario.
Note – This process is harder than it looks because executing this plan is going to be full of different types of emotions. But you gotta do it so be consistent and be reluctant to distractions.
I hope you have learnt from this article about how to bust your debt situation and get control of your personal finances. Thank you for reading this article.
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