This week is Debt Awareness Week and a great time to take control of your debt and start on a journey to living debt-free and building wealth over the long term. Here are the top nine habits to adopt to get your debts paid off.
Debt rising around the world
Inflation and the cost of living are soaring around the world, and this is having a significant effect on household debt. Recent figures released by The Money Charity in the UK reveal a rise in average household debt in the UK to £63,122 (up from £60,935 year on year).
The average adult in the UK has £3,740 of unsecured debt (unsecured debt doesn’t include mortgages) but this average hides the extremes: the lucky people who have zero debt at one end of the scale, and the millions who are drowning in it at the other.
If you are struggling with debt, this article is for you. We outline nine habits you can adopt to be able to cover the bills, pay off your debts, maintain your standard of living and, in the long term, build wealth. There’s no doubt that becoming debt-free is challenging but for most of us it is doable with a sound plan. Check out these tips.
Nine habits to adopt to get debt-free
1. Understand that unsecured debt is not your friend
Paying high interest rates on purchases which will almost immediately depreciate below the cost of the loan is extremely bad for your financial health. Credit cards, store cards and cash advances all fit into this category of loan and are to be avoided.
2. Live within your means
If you can’t afford to buy non-essential items outright, don’t buy them. That applies to clothes, meals out, gym memberships, cheeky weekends away, cars, the latest smartphone, that new Mac etc. Don’t take your credit card out with you so you aren’t tempted to splash the cash, and erase the details from your computer too to avoid falling prey to spontaneous online binges.
3. Make a debt inventory
Do you know exactly how much you owe? You’d be surprised at how many people don’t. The first step towards paying off your debt is knowing exactly how much you owe and to whom. It can be a frightening step, but it is an essential one if you are serious about living debt-free.
4. Budget to repay your debt
To give yourself the best chance of success, follow the SMART method and set yourself debt repayment goals which are Specific, Measurable, Achievable, Realistic and Timely. This will involve looking at your income and expenditure and finding where you can cut unnecessary expenses to free up cash to zero your debts. Most of us can find savings in surprising places. You can get some ideas here.
5. Make more than the minimum payments each month
Credit card companies LOVE consumers who only reimburse the minimum payment on their debt each month. They owe their huge profits to these minimum payers. If you have credit card debt, formulate a repayment plan to get them to zero as quickly as you can. But….
6. Pay off highest interest loans first
Your inventory of debt should include how much you owe, to whom and at what rates. Then direct as much of your debt repayment budget as possible to the most expensive loan, while keeping up the minimum payments on the others. Once that is paid off, move to the next most expensive. This strategy will minimise the amount of interest you are paying while you get debt-free and speed up the process.
7. Consider consolidating debts
You may be able to take advantage of zero-interest offers on balance transfers or lower rates on certain credit cards to reduce your interest payments. It’s definitely worth taking time to research this as it could save you hundreds.
8. Don’t compare and despair
Theodore Roosevelt said, ‘Comparison is the thief of joy’ and the phrase can be applied to many different areas of finance. Don’t get discouraged by comparing your debts to those of your friends and family, just concentrate on your personal debt repayment plan and keep focused on heading in the right direction.
9. Use ‘good debt’ to make long-term investments
Not ALL debt is bad. Secured debt such as mortgages, business loans and student loans are an investment in the future and the value they add are worth the amount they cost. Interest on these types of loan is generally lower and the lenders will want to ensure that monthly repayments are easily within your budget.
Debt-free living is not easy, but it IS achievable if you budget, plan and stick to a repayment schedule over the long term. Paying off debts is the first level of the financial planning pyramid and provides a solid foundation on which to build and secure your financial future.
Start paying off your debt today.
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