Paying The Bill
When you use debt to pay for things, you will eventually have to pay it off.
What we buy with debt can range from big ticket items to everyday expenses. Credit is relatively easy to obtain at an interest rate highly dependent on your credit score.
The problem with using debt is that one day we are going to have to pay the bill. We can only put it off for so long. The longer you have the debt the more it is going to cost you in interest, penalties, and fees.
Having too much debt can prevent you from being able to buy a house with a mortgage as you can be deemed as too risky by the lending institution when they asses your financial situation.
Debt can even prevent you from getting your dream job.
When you are ready to take control of your finances take the following steps;
- Know your current debt situation
- Stop using debt to fund your life
- Plan out how you are going to pay off the debts
Know your Current Debt Situation
This can be the hardest part. You know that you are in debt but you might not yet know just how much debt you are in.
Begin by looking through all of your bills. These can be online bills or those that come in the mail.
Open those bills and take a real accounting of your current situation. Don’t be shy and don’t put it off. Ignoring debts will not make them go away. In fact, if you do ignore your debts, it can make the situation a whole lot worse.
Debts can include;
- Buy Now Pay Later
- Car Payments
- Council Tax
- Credit Cards
- Loans
- Mortgages
- Payday Loans
- Store Cards
- Student Loans
- Tax Bills
- Utility Bills
There are also many other types of debt. Basically, if you have borrowed money in any form, it is a debt.
When listing out the debts make a note of the balance, the minimum payment amount, when the minimum payment is due and the interest rate.
Stop Using Debt to Fund Your Life
To have any real hope of paying off your debt, you must stop using debt to fund your lifestyle.
Use a budget and only buy the things that you absolutely need.
Don’t waste any of your money.
There will always be shoes and clothes and tech to buy in the future. How much cooler will it be to buy those things when you can afford to pay for them instead of buying them with the hope of paying for them one day.
By the time you can afford those things you may even realise that you don’t even need them at all.
Remember that everything you buy using debt, will cost you a whole lot more than you initially bargained for. Whether that is in money, stress or even lost future opportunity. Ten years from now do you really want to be paying off a debt related to meals and clothes that are long gone? Or would you rather use your money to pay for a holiday?
Once you escape the cycle of debt you have the freedom to choose what to spend your money on, and not have the lenders dictate how you must spend your life in service to debt.
Budgeting and Expense Reduction
- To create the space in your finances so that you can pay off debts you need to stick to a budget and reduce your expenses.
- Create a detailed budget to track your income and expenses. You can do this in excel, or in a notebook. The important aspect is that you list all your financial incomings and outgoings.
- Identify areas where you can cut costs. Consider downshifting your food shopping, using own-brand items, and meal planning to reduce waste.
- Use comparison sites to find better deals on utilities, insurance, and other services. You can make real savings by shopping around for a better deal.
- When creating the budget, I find that by allocating money to debt first I can make sure to keep up the debt repayment progress and then make what I have left stretch until the next payday.
Plan Out How to Pay off the Debts
This is where the list of debts will come in handy. With the list you created you can choose a debt repayment method such as the Debt Avalanche Method or the Debt Snowball Method.
The important thing is that you plan your debt repayment journey and stick to the plan.
You can prepare a yearly debt repayment plan, or even a plan that takes you through to having every single debt paid off in full.
Choose what works for you. Be realistic with the amount you can put to paying off debt and remember that as you pay off one debt add the money you were spending to pay off that debt to the money you are paying off the next debt. That way it will quickly grow and you will pay off your debt sooner.
Which Debt Repayment Method Should I Use?
You can focus on one, or use a combination of the methods. The most important thing is that you make a start.
Debt Avalanche Method
- This is where you pay off the debts in the order of highest interest rate to lowest.
- This approach makes the most mathematical sense because it minimises the total interest you will pay over time.
- Start by making the minimum payments on all the debts, and then allocate any extra cash toward the debt with the highest interest rate.
- As you pay off each high-interest debt, move on to the next one.
- With the Debt Avalanche Method, the interest rate is the most important aspect. If you have debts at 23%, 15%, 5% and 21% you would pay them off in the order of 23%, then pay off the debts at 21%, then 15% and 5%. From highest interest rate to lowest interest rate.
- The overall balance is the least important. It is the interest rate that dictates the order of repayment.
Debt Snowball Method
- This is where you pay off your debts from smallest balance to largest.
- While this method may not be the most cost-effective in terms of interest savings, it provides a psychological boost by allowing you to quickly see progress.
- It’s great to see the debts being paid off.
- To do this, make sure you pay the minimum payment on all debts, and put any extra money toward the smallest debt until it’s paid off. Then roll that payment into the next smallest debt.
- Continue to do this until all your debts are paid off.
Remember, the best approach depends on your individual circumstances. Assess your situation, choose a method that aligns with your goals, keep making the minimum payments on all other debts and take consistent steps toward becoming debt-free.