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Seven steps to get out of debt fast on a tight budget
It’s no secret that debt plagues many of us in today’s world. Whether you have a home loan, credit card debt or clothing accounts to pay off, it can feel like an endless gap between what you owe and the money left in your bank account. But the good news is there are practical steps anyone can take to get out of debt fast on a tight budget – and they don’t require years of sacrifice! In this blog post, we’ll discuss seven steps to help you pay off debt faster while creating greater financial freedom for yourself in the process!
STEP 1 – TAKE STOCK OF YOUR FINANCES
Review your finances to identify expenses and debt payments that are taking up the most of your budget. A key step to debt repayment on a tight budget is understanding where your money is going and how much debt you have.
Make a list of all your debt, including the amounts owed, interest rates and minimum payments. This will give you an overall picture of what debt needs to be paid first and which debts can wait. Also, make sure to note any penalties for early repayment of a debt.
Once you know which debts need more attention than others, you can start making payments against them in order of priority.
Take a hard look at what’s essential and what can be cut from your budget. Your focus should be to try and reduce as many non-essential expenses as possible to free up your expendable income.
Evaluate every expense over a couple of months, and consider if it is a “want” or a “need”. You may even rope in the help of a level-headed and trusted friend because it is easy to confuse “wants” as something you need. Specific needs, like rent, food and transportation, can also be reduced. For instance, a home loan you can’t afford may strain the rest of your budget, pushing you to use expensive debt (such as credit cards) to buy essential items. This cycle can continue for extended periods, pushing you further and further into debt. Selling the house and renting an affordable place according to your needs and budget constraints may be an option to consider under extreme circumstances. But before doing anything drastic, ensure you have explored all alternatives, including debt counselling!
Track your expenses by writing down every payment (including the car-guard tips!) in a small notebook you can carry with you. You can probably use a note function on your phone, but deliberately writing down every expense can make you more mindful of how you spend your money and maybe even your relationship with money. If you want to explore this method further, you may want to read up on Kakeibo. It is loosely borrowed from a Japanese budgeting method, meaning “Household Financial Ledger”.
STEP 2 – CREATE A BUDGET AND STICK TO IT!
If you are like many other people out there, you might find the thought of budgeting intimidating. But it doesn’t have to be. In fact, creating and maintaining a personal budget can help you take control of your finances, pay off your debt, and make better decisions about where to spend your hard-earned money.
We will explore a bit more on how to create your budget easily. But before we do that, remember this: Your income must always be more than your expenses. Sounds simple, right? It is, unfortunately, often the simplest things that are the most difficult to do.
Use available tools and templates to outline your personal budget. For instance, Microsoft Excel, LibreOffice Calc and Apple’s Numbers all have several free templates for personal finances and budgets. If you want to go old school, use a pen and paper. Want to go online? There are online tools available to help you create your budget.
Start with your income
Start by writing down all of your sources of income in one place so you can start to see the big picture. This will also help you develop an accurate spending plan and ensure you don’t overspend or under-budget any given month.
Next, where does your money go in a month?
Now that you know how much money is coming in each month, let’s examine your expenses. You have already done the groundwork in the first step. Your list of expenses must include fixed expenses such as rent or home loan payments. But the list must also make allowances for variable costs such as food and entertainment. Doing this step helps paint an accurate picture of your financial health and lets you know where adjustments need to be made for your budget to remain balanced.
Now, tweak it!
Once you understand how much money is coming in each month versus how much is going out each month, it’s time to make some tweaks if needed. For example, maybe certain items could be cut out or reduced. Perhaps there are ways to increase income. These are all critical questions that should be considered when creating a personal budget. Once the dust has settled—literally and figuratively—you should have a clear idea of what needs to stay versus what can go for your budget to make sense.
STEP 3 – PAY MINIMUM PAYMENTS ON ALL DEBTS EXCEPT THE SMALLEST ONE.
Once you have created your budget and freed up some extra cash, it is time to get to the serious business of paying off your debts. First, identify the debt with the lowest balance, create a debt repayment plan and start paying extra on this debt. If two amounts are the same or very close to each other, look at the interest rates. The debt with the highest interest rate will usually be the better option to pay off first.
Paying more than the minimum payment will speed up debt reduction and free up more cash flow once a debt is settled. The freed-up cash flow can then be used to tackle the next debt.
STEP 4 – THROW EVERYTHING YOU CAN AT THE SMALLEST DEBT UNTIL IT’S PAID OFF
Step four includes a bit of step three, in that as much extra cash should be used to pay off the smallest debt. Think bonus payments or any other money-related windfalls that may come your way. However, there are also other ways to get some extra cash to help you throw everything you have at your debts.
Sell unwanted items.
It is probably easier than ever to sell unwanted items. Facebook Marketplace, Buy-and-sell Facebook groups, Bidorbuy and Gumtree, are all available online to sell unwanted goods. Second-hand stores are also an option if you don’t want to sell online.
Take on odd jobs or start a side hustle.
Before you start: Always check with your primary employer if they will be okay with you working on the sidelines. You don’t want to get in hot water with your primary source of income while paying off your debts!
Amongst many other lessons, COVID-19 taught us a lot about taking on odd jobs or starting a side hustle as an effective way to generate extra income. So why not apply that when trying to pay off debt quickly and on a tight budget? With the right attitude and determination, anyone can turn their spare time into cash flow by taking on odd jobs or launching a side business. Whether it’s freelance writing, web development, virtual assistance, pet sitting or teaching English online, plenty of options are available for those who want to make extra money while paying off debt.
Before diving into any side gig or freelance work, research is essential. You’ll want to know exactly what skills you need to succeed and what the market is like for your particular service. Do some research online and ask around to get an idea of the type of work out there and the kind of money you can expect to make.
Figure out how much time you can commit each week and stick with it—this will help keep you motivated even when the going gets tough. Plus, having a regular side hustle means that no matter how bad the economy gets or how uncertain the job market becomes, at least you’ll always have something steady coming in!
STEP 5 – CELEBRATE WHEN YOU PAY OFF A DEBT.
When you pay off one debt, don’t move on to the next. Celebrate and recognize your efforts! You worked hard and should be proud of this accomplishment. Take some time to enjoy what you have achieved before you start paying off another debt. Even a small reward, like giving yourself an extra day off to do something fun, can be enough.
Celebrating is essential and should be done more often for our small and big victories and achievements!
STEP 6 – REPEAT STEPS 3 TO 5 UNTIL ALL DEBTS ARE PAID OFF.
Stay motivated by keeping track of your progress and celebrating your successes! Remain focussed on your goal to be debt free. Specifically when you start paying off the larger debts, which may take a bit longer o finish.
STEP 7 – WHEN THE LAST DEBT IS PAID OFF, CONGRATULATIONS! YOU’RE OFFICIALLY DEBT-FREE!
Now that you’re debt-free, resist the temptation to go back into debt.
Think carefully before buying anything on credit. Is it really essential? For example, replacing worn tyres on your primary method of transport is critical, whereas going on a luxury cruise may not be. Think of your future self when you work years on end, with nothing to show for it other than paying off the debt you made for something silly that you just “wanted”.
Instead, save up an emergency fund and put it in a secure account to avoid going into debt again in case of any unexpected financial expenses or income changes.
Congratulations! Now that you’ve followed these seven steps to get out of debt fast on a tight budget, you are one step closer to greater financial freedom.
Start setting some goals for yourself and make sure to stay on track with your budget, so you don’t fall back into debt. Good luck!
This article was written as general information only and does not constitute advice. It is recommended that specific professional advice is sought before taking any action. There is nothing wrong with seeking professional help if needed.
- Transunion – Things you need to know about managing your debt.
- Africanbank – How a financial advisor can help you.
- National Credit Regulator
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