7 Top tips to tackle your debt in 2021
7 TOP tips to tackle your debt in 2021
If you're subscribed to my YouTube channel (and if you’re not, you should be), then you will know that currently, I am completely debt free. Over the past few years I've managed to pay off all my debt without sacrificing my quality of life too much. It’s a great and glorious feeling and I wanted to share with you some simple tips that I followed that allowed me to become debt free. So without further ado, here are 7 Top tips to tackle your debt in 2021.
1. Understand your debt
The first thing you need to do is to understand your debt. You need to start off by doing a complete assessment of where you are and how much debt you are currently in. Start by listing out all your debt, no matter how small. Even if it's money you borrowed from friends and family. Beside each of your debts write out their respective balances and interest rates. You need to get the full picture of where you're starting from so you can really make a plan to tackle your debt.
2. Track spending down to the cent
Let's face it. You didn't get into debt because you have excellent control over your finances. Now don't get me wrong, some debt is necessary eg a mortgage to purchase a home, student loans to get an education or even a car loan to get a car. But, oftentimes your inability to pay off your debt or make a real dent in your debt payoff comes from not knowing where your money is going.
When you start tracking your expenses you learn where your money keeps running away to and you are better on your way to figuring out how to create your debt repayment strategy and plan. Because expenses add up and by writing things down you may be surprised to see where your money is going and how much you could be saving by cutting back on certain things. It can be a real eye opener. Whether you choose to use an app, an excel spreadsheet or good old fashioned pen and paper, tracking how much money you have coming in and how much you’re spending is a great way to assess your current financial status.
3. Make budget
To some people, the word budget may seem like a curse word. Just hearing about a budget makes them feel restricted, suffocated and overwhelmed. But a budget isn’t the shackles that many people make it out to be. In fact, a budget can be very freeing. It can truly help you to optimize your lifestyle and carry you closer to your goals. It all comes down to the allocation.
The basic budget can be divided into two main categories; wants vs needs. The needs are those things that are a must and should be met. They are usually recurring costs and include things like savings and investments, bills, personal care, groceries, transportation, mortgage/rent, health care, child care and so on. The wants are those items which we buy based on a whim or on giving into consumerism like random amazon purchases, designer bags that you can’t afford and so on. Now don't get me wrong I believe in a life of balance and enjoyment but there is a way to do so without a detriment to your finances. A budget helps you to be aware of the money available to you and allocate it according to your personal goals and current main expenses. The most common budget allocation is the 50-30-20 rule. 50% on needs, 30% on wants, and 20% on savings or paying off debt. I prefer to reallocate and put more into savings and debt payoff so I can reach my goal quicker, So my budget looks more like 40-50% on bills and expenses, 30-40% on savings, investments and debt payoff and 20% on wants.
4. Cut it out
Making major financial changes in your life isn’t going to happen overnight so give yourself some time to adjust to your new lifestyle and financial changes. A part of this change is likely to include cutting back on frivolous spending and luxuries. It doesn’t mean you can’t have nice things, it more means that for big purchases and luxuries, you will have to save up for it so it doesn’t affect your ability to pay off your loans. And don’t worry, it won’t last forever; cutting back temporarily to make more money available to pay off debt is a small price to pay in the grand scheme of your living the fabulous lifestyle that you want.
5. Use extra money to pay off debt
Now comes the exciting part. You found some areas where you were squandering money or maybe you got an unexpected bonus at work or you lucked into some cash. Either way, at some point you noticed you have a bit more money left over from your budget than you previously realized. Now it’s time to take action. Use the extra money to make payments on the PRINCIPAL of your loan to make significant dents in your loan. Paying on the principal means you are making a direct contribution to the loan balance and not just to the interest that the bank or loan/credit agency is making on the loan. And if you make enough payments, then you’ll see your loan balance going down and down quickly until you reach zero. And another loan bites the dust.
6. Debt payment method
When tackling and paying off debt, it is best to have a debt payment strategy that you follow. The two most popular ones are the debt snowball method and the debt avalanche method.
The premise of the debt snowball method is to pay off all your debts starting with the smallest debt balance and moving to the largest.
Here’s how it works:
1: List your debts from smallest to largest, regardless of interest rate.
2: Make minimum payments on all your debts except the smallest
3: Pay as much as possible on your smallest debt until it is completely paid off
4: Once the debt is paid off, move on to the next smallest debt and use the newly freed up money to pay more towards the debt
5. Repeat until each debt is paid in full
This is different from the debt avalanche method where the premise is to pay off all your debts starting with the debt with the highest interest rate first, regardless of amount. So just like the debt snowball method, you list all your debts but this time you place the interest rates beside each debt. Then, you make as large as possible payments to the debt with the highest interest rate until it is completely paid off and then you move on to the next highest interest rate and so on until all your debt is completely cleared off.
Neither method is necessarily better than the other, it’s more about your preference and what is in your scope of debt repayment. In the end, all that matters is that you’re making payments to completely pay off all your debts.
7. Make more money
Honestly, sometimes our budgets are just stretched to the max. I'm sure we’d love to pay off our debt but we just don't have the money to do it. We've cut back as much as possible but our salaries are just not enough. And at this point it's time we start looking into earning more money. Whether it involves negotiating a raise at your current job, starting a second job or starting your own side hustle; it's time to increase our income streams. Making more money and using it to contribute to debt repayment may be the only step you have left if you’ve explored all your options, doing all the right steps and just can’t seem to make a significant impact on your debt. You can’t use what you don’t have and if you just don’t have the money, it’s time to create ways to make more money to truly live the lifestyle you want.
There you have it loves. 7 Top tips to tackle your debt in 2021. Hopefully you found these tips useful in your debt repayment quest and you too can be debt free in 2021.
