Your first financial goal should be to get out of bad debt fast. From now on never spend more than you earn. Remember that the borrower is the slave of the lender. You will have to work forever in order to pay off these debts. You won’t be able to make your own decisions.

Your Debt payoff goal

Your aim is to pay off debt (excluding your primary mortgage) as soon as possible and once you are finished, you can then focus on building wealth by investing excess savings built. Your aim would be to get debt free within two years.

7 Steps to pay off debt

• Create a budget and set pay off debt deadlines
• Stop borrowing more money today
• List and pay off your debts starting with the most expensive
• Increase your income
• Reduce your spending
• Use your existing assets
• Consolidate debt

1. Create a budget and set pay off debt goals

To control your household’s income and spending and pay off debt, you need to keep a budget. At the end of every month a budget must be prepared for the following month before the month begins. A written plan will help you psychologically to achieve your goals of debt repayment. A budget will also lower your stress due to financial strains since you will feel in control of your income and expenses. You need to start your budget now using our tools below because there is a saying “what gets measures gets accomplished”.

2. Stop borrowing more money today

The first step is to stop borrowing more money using credit cards, short-term loans or any form of debt. Another important step is to remove your credit cards from your wallet and stop using them from now on. From now on use only debit cards for any of your expenses.

3. List your debts ordered by interest rate and start paying them off step by step

List all your debts except your primary mortgage from the most expensive debt in terms of interest rate paid to the least expensive debt. Set a target date for each debt, and put in as much disposable income so you can get rid of it quickly. The main idea is to build momentum and get moving fast. Focus to repay the first debt and once this is done move to your next enemy.

4. Increase your income

To pay off debt fast you will need to use all your household’s resources to maximise your income. Learn more on how to increase your household income here.

5. Reduce spending

Keep your budget updated, review your expenses every month and reduce your spending. Your priority should be to spend on your family’s living costs. Your first step should be to budget the amount your family needs for 1. Food, 2. Home, 3. Clothing, 4. Transportation and 5. Debt repayment. This is your first level to achieve financial stability. Once you set this, you should minimise what you want in terms of luxury spending until your savings and assets produce enough income to purchase your wants.

6. Use of your Assets

Use the Internet to sell any stuff you don’t currently use. You can also find value in any of your assets you haven’t think of. For example, you could rent a space of your home which is not currently used. Sit down, list your assets both physical and non-physical and think of ways to sell, rent or use your assets to create extra income.

7. Consolidate Debt

When interest rates are low, consolidate your debt, renegotiation payment holidays or take longer loans with smaller repayments.

Don’t use your 401(k)

Do not use your 401(k) accounts to pay off debt, since cashing out a 401(k) early incurs taxes and penalties which can lead to losses of 40% of your money.

Debt compounding

Einstein said “Compound interest is the 8^th wonder of the world. He who understands it, earns it, he who doesn’t pays it”.

Debt compounds that is why you need to take control as soon as possible.

If for example you have a loan of $1,000 that compounds weekly and carries a 10% interest, you pay 1/52^nd of 10% each month.

The balance of your loan changes as the deposit or debt compounds. At the end of the first week the balance of your $1,000 loan has become $1,002. The interest charged on the second week will be calculated based on the $1,002 balance not the initial loan’s value of $1,000. Hence the interest added during the second week would be $1.927 instead of $1.923.

Since the balance changes as your debt compounds, the amount you owe 10% increases with each compounding period, so you end up paying more than if the loan compounded only once a year.

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