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.

Begin by LISTING EACH DEBT:

·         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.

How to get out of debt

Eliminating debt from your life can be the same as doubling your income! Being free from debt is guaranteed to turn your life around and reduce the level of stress that you and your family have to face.

Credit is both useful and dangerous. Freely available credit allows us to buy today what we can't afford today. But easy access to credit often leads to large amounts of debt. With large amounts of debt people discover that they are in trouble. Their income no longer covers the expenses and there seems to be no end in sight.

Many articles about getting out of debt suggest a debt consolidation loan. This may help in the sort term, but remember: debt consolidation does not get rid of the debt problem! It combines all your debt into one. It turns short term debt into long term debt. It may ease the budget, but the benefits are purely temporary.

If you are in real trouble where your debt exceeds your assets, then sequestration or bankruptcy may be the answer. You will be starting again with severe restrictions on your financial independence. Once rehabilitated, you will own nothing but be debt free! Do this if you have to, but only when you have tried everything else.

For most people, the solution lies in setting up a debt elimination plan. The plan is simple to follow but will require some difficult short-term lifestyle sacrifices. However, the debt elimination plan will ensure that you will be living debt free relatively soon!

STEP 1: LIST YOUR DEBTS

Identify how much you owe and what you spend each month to repay debt.

Make a list of every debt repayment that you have. Include the mortgage, car finance, personal loans, credit cards, store cards, companies and people that you owe. Include payments that are in arrears. If the rent is in arrears, then it too becomes a debt.
For each debt, List the current repayment, the rate of interest charged, the outstanding term, payments that are in arrears.

Get the total monthly repayments and the total amount owing.

Knowledge is power! Knowing the extent of the problem is the first step towards fixing it.

STEP 2: REVIEW YOUR BUDGET

Now review the total household budget.

If you don't know where your money is going then carry a notepad with you for the next month. Write down every payment that you make. The more detail you record, the better.

Make a list of everything that you spend and pay on a monthly basis. Include all repayments.

Total your monthly expenditure items to get a grand total.
List your total household income in a separate column. Compare the total of this to your total expenditure.

STEP 3: SCRUTINISE YOUR SPENDING PATTERN

Involve the entire household in reviewing the budget. Review each item. Ignore fixed costs for now. Identify any spending that you could easily do without.

Look for luxuries or spending that can be cut. Use the detailed list that you created over the past month. Keep reviewing the budget to see if there are any areas where spending can be reduced.

If you cannot reduce your spending plan this way, then look at your debt and investment portfolio.

It may be prudent to suspend monthly investments for now. Once you are debt free, there will be much more available for investment. Don't stop life insurance premiums or retirement contributions unless this can be done without penalties.

Finally, look at your debts. Make arrangements with the bank to pay interest only on your mortgage (and perhaps on other longer term debt) for the next few months. Try to negotiate a lower rate of interest on your credit card, home-loan and overdraft.

STEP 4: CREATE A NEW SPENDING PLAN

We will call your new budget a spending plan. There should now be a surplus of income over expenditure. If there is no surplus, then go through the previous steps again. Perhaps look at ways to earn extra income.

STEP 5: THE DEBT ELIMINATION ACTION PLAN

The action plan involves targeting your debts one at a time. Go back to your list of debts. The usual advice is to target the debt with the highest rate of interest. It is more effective to target the smallest debt first. The reason for this is to free-up funds as quickly as possible to pay off more debt more quickly.

Take the debt with the shortest remaining term. Add the surplus that you created in Step 4 to the normal repayment. Pay the additional amount each month until the debt is paid.

The total enhanced repayment of the first debt has been freed. Once again select the debt with the shortest remaining term. Add the freed-up funds from the paid-up debt to the normal repayment. You will be able to pay off this debt much more quickly!

Each time a debt is repaid, more funds become available. Repeat the process until you should have repaid everything but the car and home-loan.

During this phase of the plan, all available funds are used to eliminate debt. Each time a debt is paid up, more funds are available to pay off the next debt. You are becoming one step closer to living a debt-free life!

STEP 6: WHAT ABOUT THE HOUSE AND THE CAR?

The same principle may be applied to the car finance, but check that you will save by repaying early. If you will be charged the full-term interest there is little point in repaying it now.

If you apply all of the freed-up funds to your home-loan, you could reduce the repayment term by 50% to 75%. Pay off your home in five years rather than twenty, and save a fortune on interest.

You will be living in a paid-up house with a paid-up car and no debt. You should have enough cash flow to buy major items with cash.
However, you may decide that it is time for a reward. Increase your mortgage repayments, but allow some extra for yourselves.

STEP 7 MAINTAINING WHAT YOU HAVE ACHIEVED.

Having achieved this step, it is important to maintain the new status quo. With the exception of a home purchase and perhaps a car, pay for everything with cash. Buy it when you can afford it. Spend only what you can pay for.

Set aside ten to fifteen percent of your disposable income for investments.

You have taken the first step to achieving financial independence. The journey may involve some sacrifices but the rewards are huge.

DOES THE PLAN ALLOW FOR FLEXIBILITY?

If followed to the letter, debt can be eliminated relatively quickly achieving massive long-term savings on interest.

Be flexible if you must it is your choice. Reward yourself each time a debt becomes paid-up. Add a portion of the freed-up cash to improve your living standard. It will take a little longer, but perhaps you need to feel the rewards as they occur.