When it comes to debt, you can’t seem to pay it off fast enough. Especially if you have neglected a payment or two, the task of dealing with it can seem very intimidating. If you want to be debt-free faster, there are a couple of things you need to look at before you start making payments.
Step 1: Stop digging… err spending
If you fell into a hole that you have been busy digging yourself, the very first thing you would have to do before attempting to climb out is just to stop digging. If you want to pay out your debt, you need to do it by not spending what you do not have.
Here are the things that need to go now:
Cancel that membership to the expensive gym you never visit and go for a walk or jog instead.
Delete those shopping apps from your phone that tempt you to check out the latest collections and most probably have your credit card details saved.
Step 2: Draw up a budget
You can choose from several tools online to help you devise a budget. Total up all your estimated expenses for each month and subtract them from your monthly income. If the difference is negative, you must make immediate adjustments to create savings. It would be helpful to look at your bank statements for more accurate spending patterns. Once you have eliminated or minimised your “wants”, think about strategies to better economise your spending on “needs”.
Perhaps you can use public transport more often or better plan your grocery shopping to ensure fewer emergency trips to expensive chains that are closer home. Every dollar you save brings you closer to your goal.
Once you are set up to survive the month while saving the extra buck, there are 2 popular debt-repayment methods to choose from:
Method 1: Avalanche
List down all your debts in order of interest rate. After you pay off the minimum amount required for each, use the remaining money towards the loan with the highest interest rate. This method is the most mathematically efficient way to prevent your debt from compounding and get you to debt-free zone fast.
Here is how you would do it if you had the following debts:
Method 2: Snowball
When you draw up your list according to the snowball method, put the smallest loan amount first, regardless of the interest rate. So after paying off the minimum, the rest of the money would go towards the lowest amount. Seeing your list of loans shrink visibly has a positive psychological impact. It creates a feeling of progress and encourages one to continue the work with more commitment.
An example to show you how your spreadsheet would look like:
Which method is better?
Just like there isn’t one career choice that is right for everyone or one kind of exercise that works for all, there is no single method of paying off debt that’s the perfect fit for everyone. Some introspection and some trial and error could set you on the right path. The snowball method is a better choice if you are working to pay off a few small-sized credit card bills for instance. However, if it is a more significant home loan, you might be better off if you prioritise payments with the highest interest rates first.
If you still feel overwhelmed and feel that you could use some help, there are organisations like Credit Counselling Singapore that can work with you. Don’t be shy to get the help you need. Stick to your plan and don’t forget to have a little fun every now and then. You will be debt-free sooner than you think.