Saturday, 10 April 2010

Get out of debt

Becoming debt free will change your life! The long term pay-off provides a huge incentive to commit to the short-term sacrifice that is required to get out of debt.

Debt can be a major source of stress. As debt builds, it becomes more and more difficult to manage. An increased income seems to have no effect and each month becomes another struggle to make end meet. Without drastic action, the cycle will continue for many years resulting in blacklisting by credit bureaus and worse.

Debt consolidation is often marketed and presented as a solution. Debt consolidation may ease the budget, but it simply transforms short term debt into long term debt.

If the debt related problems are really severe, the Oak view law group (USA only) offers a debt consolidation service that may provide considerable relief. Click on the link for an assessment.

In extreme cases, sequestration or bankruptcy may be the only answer, providing the opportunity to start over. But you start over with nothing and have to live through a period of rehabilitation.

For most, a debt elimination plan provides the answer. If you follow the steps carefully you should be able to get out of debt relatively quickly.

·         how much you owe,
·         the rate of interest and
·         the remaining term of the debt.

The list must include everything you owe including loans and arrears on current accounts.

Follow this with a full and honest REVIEW of your SPENDING PATTERN. If you are not certain where the money goes, carry a notebook at all times and record what is spent and on what. COMPARE what you SPEND against your INCOME.

Involve the entire household to carefully SCRUTINISE what you spend.

IDENTIFY what can be CUT from your monthly spending. Which items can be eliminated from the spending plan without having a major impact on your lifestyle?

Suspend any monthly investment plans for now, but do not stop your life insurance or retirement funding unless this can be achieved without penalties.

Speak to your creditors. Perhaps the bank will agree to interest only mortgage payments or to reduce the interest charged on your credit card.

DRAW UP A NEW SPENDING PLAN. The new spending plan is based on the old one without the eliminated items. You should be left with a small surplus. This SURPLUS is the vehicle for your plan to GET OUT OF DEBT.

If you haven't managed to find a surplus, then repeat these steps. It may be necessary to compromise on brands or to make some lifestyle adjustments until the get out of debt plan starts to produce results.
The main idea of the get out of debt plan is to TARGET your debts ONE AT A TIME. Each debt that is paid off represents a major MILESTONE. Each time you reach a milestone, you become much closer to your TARGET of achieving a DEBTFREE LIFESTYLE. List each debt by size from smallest to largest.

Add the surplus generated in your new spending plan to pay off your SMALLEST debt. The extra payments will enable you to pay off this debt more quickly. Once you have achieved this milestone, reward yourself and your family with something that will be valued.

There is now one less payment to worry about each month. Add this saving to the original surplus and a much more substantial amount can be used to target the next debt.

The higher repayment will allow you to reduce the term of the second debt even more quickly.

Follow the same procedure to eliminate the third and subsequent debts. As you reach each milestone remember to reward yourself and your family. As each debt is paid off, more funds become available to target the next.

The same principle should be applied to the car loan unless you are committed to paying interest for the full term regardless of early repayment.

With a much improved cash flow, it is time to target the home loan. Increasing your payments on the home loan could reduce the repayment term by as much as 50 to 75%. You will save a fortune on interest and will have more cash for investments and to improve your standard of living.

Once you have managed to get out of debt, it is very important to maintain a debt free lifestyle. Be careful not to fall into the dangerous debt cycle again!

Use the first 15% of your income to pay yourself in the form of long term investments. Put aside another 1015% for future purchases and emergencies and pay cash for your next new car.

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