I am going to pick up where I finished off last week, and outline seven strategies that will help reduce your debt significantly. Before I start, however, let me say to those people who are in debt, try not to dwell on the past and beat yourself up about it; it is what it is. They key to getting out of debt is becoming focused, organised and motivated to succeed.
1 Know what you are up against
Write down all of your loans, and put the loan with the highest interest rate at the top of your list down to the loan that is costing you the least at the bottom.
Typically the loans with the highest rates of interest are short term debt and they are the most dangerous which is why you should concentrate on getting rid of them first. They have the greatest potential of getting you into further trouble.
Focus on one loan at a time by paying the minimum amount you can off all of your other loans except, the first one. This is the one that you should pay as much towards as you can until it is paid off in full.
Once this loan is paid off, use that money as an extra payment on loan number two. By doing this, the amount you are paying against your debt grows like a snowball each month and if you do this, I guarantee you, you will repay your debts off much quicker.
Review your spending
You need surplus cash each month that can be used against your debt, and there are two ways you can find this extra cash. They are (a) earn more or (b) spend less. If you can’t earn any more then you need to know where your money is going each month.
For one month, write down what you spend and review it at the end of the month. This will highlight the areas you are spending too much money on that could be re-directed to paying off your debt.
Use cash to pay down debt
I understand that some people don’t like the idea of taking money out of their savings account to pay down debt but, believe me it makes financial sense if you do.
For example, if you were to borrow €5,000 over three years at an interest rate of 10% the amount of interest you would pay in that period would be €774.
If you placed the same amount of money on deposit, the best rate you could possibly hope for over three years would generate interest of €125, so you would be €625 worse off borrowing that money against having the same amount on deposit; it makes absolutely no sense financially to do this.
Think of it this way: if you are paying 18% on a credit card debt and you pay it off with savings earning nothing on deposit, by clearing the loan you are effectively getting an 18% tax free return.
I don’t want you to use all of your savings to clear debt - you will need money in the event of an emergency so make sure you have money left over, before you pay off any debt. That can be called upon in the event of an emergency like the loss of a job etc.
Set up a debt insurance account
I sometimes call a savings account a debt insurance account, because, of course, there will be times when you have to take on debt – e.g. the car packs in.
But what if you had money to fall back on in your debt insurance account to pay for these unforeseen events? Then you won’t have to get into debt in the first place. Having savings in your “what if” account can bail you out when these unforeseen events arise.
My advice here is to build your emergency fund first and then attack your debt – it doesn’t work trying to do both at the same time.
Stop adding new debt
Not rocket science but I see people who complain about their debt levels, then go away and take on new debt! Depressed at the levels of debt they have, they need a holiday to get away from the stress. But funding the holiday by borrowing money is only going to make your situation worse.
Abandon the idea that you will win the lottery/inherit money
I come across people all the time who are hoping that one day something will happen that will make their financial situation better. Some think that is winning the lottery, inheriting money, their in-laws leaving them money and so on. They are deluding themselves into justifying taking on new debt and they know it.
They don’t do the simple, every day small steps like budgeting or getting rid of the car loan that is killing them and trading down, because they are waiting for the big bang. So, please don’t depend on things outside your control because the odds are stacked against you.
Reduce your interest rate – better still switch to 0% providers
If you can switch your credit card to a 0% provider for a period of say 6 months (PTSB/Tesco/KBC) the full amount you are paying each month is going towards reducing the amount you owe. I did this for a client of mine recently who owed c. €5,000 and rather than paying €71 in interest each month, that amount was now coming off the amount he owed so he saved himself €426 in 6 months.
And if you can’t switch to a 0% provider, reducing the rate will still make a big impact. A friend of mine switched a loan he had from one of the main banks to a credit union where the rate was 5% cheaper and ended up saving himself €29 per month and €1,747 in interest payments over a six year period. But do you know what he did, he continued paying the credit union the amount he had previously been paying so he was overpaying his loan by €29 per month which reduced the term of the loan from six years to five.