WHAT YOU SHOULD KNOW ABOUT DEBT IS, FIRST AND FOREMOST, THAT THERE IS GOOD DEBT AND BAD DEBT. When we hear the word "debt" we usually shudder and it's true that there are few things on this earth that conjure up such dark emotions. Debt brings up shame, which is the lowest frequency we can have, according to David R. Hawkins' map fo consciousness. We cannot manifest wealth when we live in shame, guilt, and fear - very often, we can't even get out of the survival state.
However, debt is just a tool. It's been compared to a sword, or a chainsaw - in expert hands, it can help you become wealthier, while if you don't know what you're doing, you'll end up hurting yourself. Good debt is meant to help you grow both personally and professionally. Used wisely, debt can increase your net worth and in the long run, make you wealthier.
Examples of good debt:
- business loan
- student loan
- mortgage
- using credit cards to fund further training and qualifications.
And here are some examples of bad debt:
- car loans
- high interest credit card
- consumer debt to finance large purchases
- pay day loans
It's easy to fall into the trap of pay day loans if you've, for example, missed a payment, and you may end up taking on new debts to pay off old ones! Or if you're feeling a lot of peer pressure to keep up the appearances and look wealthier than you are. Did you know that that in the U.S., as of 2020 consumer debt reached 4.2 trillion dollars most of it comprising of credit card, auto loans and student loans?! I found this very insightful article you may want to have a look.
Before taking any loan, consider these things:
- Do I actually need this? What is making me consider a loan, is it something I genuinely need, something that could make me wealthier in the long run, or am I "keeping up with the Jones'"?
- Compare prices. Is the thing I'm looking to finance via loan cheaper? Have I scoured the Internet well enough?
- Consider the conditions, and the interest rate. Sure, I have financed consumer goods before, but it's only because there was zero interest involved, and the terms and conditions were reasonable. I have a sinking fund set up to pay off that item at one go in case of emergency.
- Know the risks. What happens if you miss a payment? Or two, of five? What happens in the worst case scenario?
- Is there a way I could buy it in cash instead? The rule of thumb goes: if you can't pay for it in cash, you can't afford it!
Unfortunately, human beings are not rational and sometimes we lack the necessary financial education to take the best decision. We do our best - circumstances can get complicated, you know. Life is full of twists and turns. So you've ended up in this sad situation of having racked up bad debt... Let's see how to get rid of it!
How to pay off debt
1. Set your mind straight
How much do you owe? How much do you pay every month (in fees and interest)? List your debts from lowest to highest, the minimum payment required... and how much you're currently paying. The idea is to pay off the lowest debt as soon as possible by adding extra payments on a monthly basis. This is called a debt snowball! It's a great strategy to boost your confidence and show you that you can do this with the right strategy! Once the first one is over and done with, roll your extra cash towards the next debt on the list. If you only have one debt? Well, halleluia! The idea behind this is that if you make extra payments towards any debt, you'll get rid of it a lot faster than expected. Want more info straight from Dave Ramsay? Read this.
Look at your spending habits
Are you good at saving, or do you buy it when you see it? I've written about why we spend, and how to be better with money in previous posts, so go ahead and have a look - but it's super important to know what makes you spend! I've seen people take on consumer debt because they need to "look" a certain way - and get stumped by credit card debt. I also know people who bought household appliances with after-payments, lost their job - and voilá, debt collectors knocking on the door. Or maybe you need instant gratification? See it - want it - buy it? There is an important mindset change you need to make and adopt a saving mindset instead. I mean, that's why they invented sinking funds!
Budget, budget budget!
Did I say that you need to budget? Yes, you need to start budgeting. And yes, I know you hate it. But here's a newsflash - even millionaires budget! It's not meant to restrict you, instead think of it as a way to show your money where to go. There are at least five different ways to budget. Other people have written on it extensively, and much better than me - you might want to have a look at this article on Nerd Wallet that explains different budgeting systems rather nicely, and choose one to begin with.
Increase your income to clear debt
If you're on a low income, it'll take forever to pay off debt, especially when they are high-interest! All the money literally goes into debt repayment, and it may seem you have nothing left to live on. Very often here is when people take out payday loans or borrow money from friends and family, just to make ends meet. The best idea is to find ways to take on some extra responsibilities at work (if possible), sell something, start a part time job... I sold three items on Wallapop this month and made €95 extra cash, how nice is that? If you're already working really hard and can't see yourself doing more because you've completely maxed out your time and energy, I suggest reading the last point on this list.
Don't stop investing
...In yourself! What does it take to pay off your debt asap? Are you lacking time, knowledge, or skills? You may actually consider ditching the snowball method for now, and just invest any extra money that comes your way into acquiring new skills. Let's assume you're working as a kindergarten teacher, or a sales assistant. The salaries aren't great, but you spend a lot of time and energy, and on top of that there's that damn debt. What could you do to start earning more in the future and pay off debt faster? Where the world is heading right now, there are more and more online jobs available, and anything to do with marketing, web design and development, or coaching, is in high demand.
Disclaimer
I'm not a certified debt counsellor and I don't work with debt consolidation. My area is personal finance and improving your relationship with money. If you can't get rid of debt no matter what you try and it keeps growing as if "out of nowhere", it must be an energetic manifestation of a past trauma around shame. Often debt is the result of low self-worth (not to be confused with self esteem), in which case you should find a good coach or therapist to help you identify and release the trauma. Don't hesitate to book a call with me and let's see if can help!