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How to get yourself out of debt.

debt_man.ment_1.jpgThe majority of New Zealanders today carry large amounts of debt, to the point where it is crippling them financially.  If you are one of them, here’s how to escape.

How to get out of debt in seven steps:

STEP ONE: Stop spending on credit.
It sounds obvious but for some people this is the most difficult part because it means breaking a habit.  It’s vital, however.  Do whatever it takes to stop spending on credit. 
  • Cut up your credit cards if you have to.
  • Adjust your lifestyle.
  • Postpone or cancel proposed spending if you need to.
  • Whatever it takes to stop - do it!
STEP TWO: Determine how far in debt you really are.
Believe it or not, many people do not know the full extent of their debt. Most people who have credit card debt believe they are paying it back, albeit slowly.  Many of these people are not making any real inroads into the debt at all.

If you are serious about escaping your debt, work out how much you owe.
An excellent online debt calculator can be found here.

STEP THREE: Cancel or freeze your cards.
Many people hope it won’t come to this.  They hope that they can escape their debt without making any real sacrifices or changes to spending habits.  That’s not possible.  You must curb your spending. 

Curbing your spending does two things;
  •  Firstly, it enables you to pay off your debt.
  •  And secondly, it instils good habits that will, hopefully, prevent you going back into debt once your current creditors are paid.

Here’s a credit card hint:
Credit card cut.jpgIf you have more than one credit card, look into transferring the balances of all of them to one low-interest card and immediately cancel and cut up the cards you have paid off.  (NB beware though; if you transfer balances in this way, make sure the new card is a low interest card and that the low interest isn’t a limited time period introductory offer.  Also check on the fees payable etc.).


STEP FOUR: Develop a Spending Plan.
To escape debt you will have to make some sacrifices.  But, any sacrifice made will be far better than the alternative of being out of control with your debt.

Set a budget that you can live by.  Then work out what further savings you can make to free up extra cash to put towards the paying off of your debt.  Now, you might say to yourself, “I only buy essentials and I don’t have any extra money each month.”  But look carefully.  There will be a few luxuries.  Ask yourself if these everyday luxuries are really worth the years of debt that could be avoided by foregoing them for a while.  How much do you spend on SKY TV, cellular phones, eating out, takeaways, cigarettes etc? 

This is one of many financial choices you get to make - debt repayment or daily luxuries you could perhaps go without for a short while.

STEP FIVE: Prioritise your debts.
From your Spending Plan/Budget you will have a realistic idea of how much money you can afford to put towards repaying your debt each month. 

Two of the main tips to debt repayment are;
  •   Pay consistently.
  •   Pay more than the minimum amount.

With that in mind, how do you decide which debts to pay off first? 
There are a couple of ways; you need to decide which is best for you:
  • Pay off debt with the highest interest rate.  This is the best way to save money as it means less is paid over all in interest.
  • Pay off the debts with the smallest balance first.  This can be very motivating as the number of debtors is decreased.

STEP SIX: Contact your creditors if you cannot make a payment.
If, based on Step Five, you make the decision to temporarily suspend or reduce your monthly payments, it is very important to contact creditors immediately, before they contact you.  Most creditors are willing to negotiate a lower payment or a payment plan that works for you.  Don’t wait, and don’t be embarrassed, creditors work every day with people in exactly the same situation as you.

By acting and contacting your creditors you can eliminate late payment fees, avoid pressure from collection agencies, protect your credit history and rating, and feel a degree of freedom from the stress of debt.

STEP SEVEN: Create a payment schedule.
The final step to getting yourself out of debt is to commit to a payment schedule.  Having decided on a realistic monthly repayment rate that you can stick to, simply be consistent in making those payments; time will do the rest.  The secret is to continue to pay the set monthly amount that you decide on.  Even after you have paid off one bill, keep going with that amount to pay off the remaining bill(s). 

Follow these three simple payment schedule rules:
  • Rule #1: Commit to a total monthly debt payment amount that works for you (remember it should ideally be more than the minimum balance of each credit card or bill). 
  • Rule #2: Continue to pay this set monthly amount until you are debt free.  This means, even when some of your bills are paid off, or your credit cards statements show a lower minimum payment, you still continue to pay the same amount as you started with.   (Do not be fooled by statements showing lower minimum payments.  This is because the minimum payment is worked out on a percentage of the amount owing.  And, here’s a secret, credit card companies love it when you just pay the minimum because it maximises the interest you are paying to them!)
  • Rule #3: As one debt is paid off, redirect that payment amount to the next debt.  Following this rule you will pay the same total monthly debt payment that you started with, even when you have only one debt remaining. 

Following these three rules successfully will require;
  • a commitment to get out of debt,
  • good money management,
  • willpower to restrict all future debt,
  • and the dedication to stick with your repayment programme.

But, you can do it!  Others have.  Others are doing it right now.  Just keep going.

Read the article from the FORTIfi Resource Centre: Ten Things to do to Help Get Your Finances in Order.

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