How to get out of too much debt?

 Getting into debt seems to be a very easy thing to do. After all, almost everybody at some point in their lives takes a significant loan or builds up some form of debt i.e. credit card debt, home loan, personal loan, car loans, or even a combination of these loans.

If you find yourself in a situation where you feel like there is too much debt to handle and you need to get out from under the debt as soon as possible, there are some simple steps that will certainly help:

 

1. Breathe
   
   It might feel like this is a great burden, and perhaps it is indeed taking a toll on your finances, but worrying about it will not make it go away.
   
   The first thing you need to do is realize that you need to take control of the situation – and the steps to do so and very simple and straightforward. Also remember, this is not an uncommon situation, it happens to a lot of people and everybody gets out of it by taking very simple baby steps towards a solution.



 
2. Do Not Increase Your Liabilities
   
   If you find that you are already stretched, you may find that well-wishers are advising you to take another loan to pay off your existing loan – and then worry about that loan later.
   
   This would not be a good idea. You would simply be delaying the time when you do have to sit down and pay off the debt. The most important thing to do is to not add to your existing liabilities by taking on more loans. Once the existing liabilities are cleared, if you find that you need to take another loan – make sure it is easily serviceable by your existing, fixed monthly income, and the terms (tenure, rate of interest) are suitable to you. But that is only after your existing liabilities have been cleared.



 
3. Take Stock of Your Liabilities
   
   Maintain a Personal Budget. This simple and under-rated tool is an excellent resource in your battle against debt – and by maintaining a good personal budget, success against debt is practically at your door.
   
   A personal budget will help you know the following:
    
   1. Your exact cash flows i.e. your fixed monthly incomes and all your monthly expenses.
      Once you know your expenses, you can see where you are spending on luxuries – and rationalize this portion. Spend on the necessities only, save the rest. Calculate an approximate figure of how much extra money you can save each month – and allocate it towards a debt repayment fund. Use these funds to pay off your debt a little at a time. You can reward your family and yourself once the debt has been cleared.
   
   
   2. Your exact liabilities
      You can track exactly what debts you have and all their details – after all, knowing your enemy is half the battle won!
      
      Create a table which contains the types of debt, each liability’s outstanding tenure, EMI, rate of interest and outstanding amount. If any of this debt is collateralized / a secured loan i.e. you have it backed it with one of your assets – you can clear this one first.
      
      The rule to be followed (and every rule has its own exceptions) is pay off the highest interest rate debt first. This is the one that is costing you the most. Typically, this is credit card debt.
      A Home Loan might be for the largest amount, but it is not costing you as much per rupee as your credit card debt.



 
4. Restructure your Loans
   
   This can be done in two ways.
    
   1. Restructure for a Lower Interest Rate
      
      Firstly, speak to each one of your lenders. Explain that you have a genuine interest in repaying the debt. Most lenders would rather restructure your loan i.e. change the terms of your loan, than turn you into a ‘bad debt’ on their books and lose the money altogether – although in the case of a home loan it is you who will be losing the home if you don’t pay the EMIs on time.
      
      Try to refinance such that you get a lower rate of interest as well as a lower tenure. Most individuals end up getting a lower interest rate i.e. lower EMIs, but a longer tenure, thereby paying back the same or perhaps a higher amount in the long term. This would be helpful if you need to ease the current strain on your cash flows by reducing your EMI.
      
      Also remember, if you are refinancing a home loan, there are conditions and payments which need to be considered such as minimum number of EMIs paid on the existing home loan, prepayment penalty by the existing home loan lender and processing fees paid to the new home loan lender.
      
      If the new home loan is cheaper and the savings by lower EMIs are greater than the fees you may incur, then refinancing your home loan is a suitable option for you.
   
   
   2. See if a Balance Transfer is Suitable
      
      Secondly, for credit card debt, you can opt for a balance transfer. But this is to be done carefully.
      
      There are a number of schemes in the market where you can transfer your outstanding balance on your existing credit card to a brand new credit card with as low as a 0% interest rate! But these rates are introductory only – i.e. they will last perhaps 3 to 6 months. Thereafter, the rate charged on the new credit card will increase to the pre-stipulated rate. This will probably be lower than your existing credit card rate of interest, but ensure that this is indeed the case.
      
      If you have debt on more than one high interest credit card, transferring the balances on these cards to a new credit card with a lower rate of interest will not only save you additional interest payment, but will also take away the mental pressure of paying more than 1 credit card amount each month.
      
      Also note that if you add an outstanding amount to a new credit card, your available credit limit on the new card goes down by the amount of the transfer.



 
5. Be The Tortoise from The Tortoise and The Hare
   
   Slow and steady wins the race. It may seem like a difficult task, but a little financial prudence, higher savings and on-schedule EMI payments will steadily reduce your debt. Just keep going and remember to repay as much as you can on a regular basis.

 

Conclusion

To get out of debt, your family and you may need to reduce some regular but unnecessary expenses such as dining out and extravagant purchases. Keep yourselves motivated to go on by planning on occasional family treat to celebrate your progress on the road to being debt-free! Keep up the good work and soon you will find that what felt like a major burden was easily overcome with a little financial discipline.

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Comments
mrfec@ssc.net.au Jul 24, 2012 Please do not consolidate. It is not free, they will lower your pemtanys by increasing the length of time until you are debt free, and you will take a hit on your credit score. Or they negotiate your debt down after telling you not to pay for awhile adding another hit to your credit score. There is a better way.A. Have a garage sale and sell anything that you no longer need or want.B.Get a temporary part time job, if you have one, get another.Here is a plan that can help you. If you work the plan, the plan will work for you:1. Make a budget. Make the budget a week before you get paid. A budget is not a punishment! It is a tool which will free you from ever having to worry about money again. Put everything in your budget. Especially those annual, biannual, or quarterly bills like car registration, insurance, etc. Give every dollar you are going to bring home the name of where it is going. Add an emergency fund category to your budget for 25 dollars and save up until you have 1000-1250 dollars. Your emergency fund will help keep you from getting into new debt because of an emergency. If you can, set up a direct transfer to a savings account for your emergency fund. That way it moves automatically and you don't even have to worry about it. You must cut your spending and live on less than you make.2.First get current on all of you debts and make no more late pemtanys. Stop using your credit cards immediately. Do not take on any more debt. Credit cards are like quicksand only the death is much slower. Make a list of all of your debts in order of highest interest rate to lowest interest. Use cash only for your spending from now on.3.Pay the minimum due on all of your debts and then put your extra money towards paying off the highest interest one first. After you get that one paid off, you put the money you were paying on debt #1 (the minimum payment and the extra payment) towards debt #2. That will pay debt #2 off faster. When that is paid off, you put all three pemtanys towards card #3 and that one will be paid off pretty quickly. As an example:To start :Debt #1 (highest interest): minimum payment+ extra paymentDebt #2 (middle interest): minimum paymentDebt #3(lowest interest): minimum paymentDebt #1: paid offDebt #2: minimum payment from Debt #1+ Minimum payment from Debt #2 +extra paymentDebt #3: minimum paymentDebt #1: paid offDebt #2: paid offDebt #3:Minimum payment from card #1+ minimum payment from Debt #2+ minimum payment from Debt #3+ extra payment.That way, you will get them all paid off, on time, and pay the least interest. It will also help towards rebuilding your credit since you will no longer have any late pemtanys. This works no matter how many different debts you may have.4. After you get all of your debts paid off, add to your emergency fund until you have 6-12 months of income saved up. Put that emergency fund money into a liquid money market fund or into a Bank of America no-risk CD so that if you need the money you can take it out without penalty.5a. When you have your emergency fund in place, add a category for fun to your budget. Save for a holiday, a vacation, a big screen, or dinners out, whatever goal you want. Remember to enjoy your life.5b. When you have your emergency fund in place, start saving for your retirement. Join the 401(k) plan at work and contribute the maximum. Your employer probably matches at least part of your contribution so why give up free money? Open a Roth IRA and contribute the maximum on a monthly basis. If you start saving for your retirement now, you will probably retire a millionaire.5c. When you have your emergency fund in place, start saving for your next car. Only buy cars, or other things that depreciate, with cash. Save up for a nicer car. That way you get the interest instead of paying the interest.You can do it and it isn't as hard as you think. Just follow the plan.
johnwesley1978@gmail.com Sep 14, 2013 Excellent Very helpful information.

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