8 Ways to Climb Out of Debt

1. Stop spending and start understanding debt

When you’re already in debt it can be easy for you to feel helpless against it and just go ahead and keep on spending but you absolutely need to get out of this consumer mentality. You need to realise that if you keep on spending money you don’t have then you’re inevitably going to end up with so much debt your whole salary won’t be enough to cover repayments. The rule you need to live by is that if you don’t need it then you shouldn’t buy it, plain and simple.

When you take out a loan you’re going to be paying interest on this loan and the longer that you take to repay it the more interest you’ll end up paying. You will also incur penalty fees if you don’t make the minimum repayments – which means you’re going to end up paying a lot more than you borrowed in the first place. Taking out personal finance to renovate your kitchen seems like a good idea but if you calculate how much money you’re actually going to end up paying on top of the total cost for the renovation you’ll see that’s it’s not worth it. If you invest a little bit of time into gaining some financial knowledge and understanding you’ll definitely start making better financial decisions and stop spending money that you don’t have.

2. Draw up a repayment schedule

You need to draw up a list of all of your debts and include the total amount owed, the minimum repayments on each as well as the interest rate. Add up your total debt and total minimum repayment and then add up your monthly expenses, excluding debt repayments. Once you’ve added up your monthly expenses you can subtract the minimum repayment total from what’s left of your salary. If you find that you simply cannot afford to make even the minimum repayments you need to go back to your monthly expenses and start cutting down on anything that isn’t essential.

3. Prioritise debts with high-interest rates

If you have a number of different debts you need to sit down calculator, paper and pen in hand and start figuring out the best way to tackle these debts, one at a time. This means that you need to prioritise debts based on which ones are costing you the most as well as which ones have the highest balances on them. Some experts claim that aiming to pay off the debts with the lowest balances first is a good way to stay motivated and although this may be true, you’re going to lose money if you don’t focus on the debts that are costing the most. With the rest make sure that you make at least the minimum payments to prevent the interest rates from increasing as well as incurring penalty fees. Credit card debt and debt incurred from short-term loans usually carry the highest interest so you should focus on these.

4. Create a healthy budget

This goes hand-in-hand with your repayment schedule but making sure your monthly budget is realistic is one of the best strategies to ensure successful debt repayment. A healthy budget is one that takes into account all of your fixed monthly expenses as well as the variable ones with the greatest degree of accuracy. You can’t decide to cut down on your groceries by 50% to meet the minimum debt repayments because this is just not going to happen. It takes a lot of time to change spending habits and at most you should cut your grocery bill by 20% to ensure that you can achieve and maintain a healthy balance. 

5. Try to negotiate a lower rate or consolidate your loans

This can go a long way in reducing your total debt, particularly if you have a number of different debts with different service providers. Requesting that the bank review your account and consider offering you a lower interest rate can’t do any harm. You could also arrange to consolidate your loans and this may be beneficial if you’re incurring all sorts of penalties with different service providers and simply finding keeping track of your debt too much to handle. Debt consolidation effectively means you’re taking out one larger loan to pay off all the smaller ones. You are then responsible for making only one larger repayment. You may think okay but then I’m going to be paying interest on this loan as well; that may be true but you’d be incurring interest anyway from the other loans. You can then focus your energy on making more than minimum repayments on this loan and this will be beneficial to you in the long run. You simply need to find a solution that works for you and if consolidation is your cure then go for it.

6. Cut down on expenses

If you’ve done the above calculations and found that you can make minimum payments you still need to cut down on your expenses so that you can allocate the extra money to paying down the debt more aggressively. If you found that you cannot make the minimum payments you obviously need to cut down on your spending until you find a combination that at least allows you to make the minimum repayments.

7. Earn extra money and allocate extra income to paying off debt

A good strategy to pay down debt is to also look for ways to earn extra income. There are literally hundreds of ways for you to do this, from getting a part-time job to starting a small business from home. This will help you pay more than the minimum and therefore not only cut the time it will take you to pay them off but also help you avoid the penalties and increased interest rates that we’ve spoken about. It may be frustrating to work 7-days a week and not be able to enjoy the additional income that you’re earning but, you’ll have plenty of time to do that once you’re debt-free. You should also allocate any bonuses, tax refunds, inheritances or other additional income to your debt repayments – you’ll thank yourself later for it.

8. Stay motivated

Even if things get tough and you don’t manage to stick to your repayment schedule because of some sort of emergency like your car breaking down, the geyser in your home bursting or a medical emergency that’s not covered by your medical insurance, you need to pick yourself up, dust yourself off and go back to the drawing board. Promise yourself to not give up until you are 100% debt-free.

If you’re completely overwhelmed by your financial situation and simply don’t know where to start, consider taking a trip to a debt counsellor's office. Consultations are usually free and you may just find a strategy that’s perfectly suited to your circumstances. Although it may seem hopeless in the beginning you will definitely see a lot of progress just by making some small changes to your everyday life.

Start today and you’ll be debt-free sooner than you think.