No one wants to be stuck inside the vicious debt cycle.
Yes, borrowing money has its benefits. It can provide you with the funds that you need to make an important purchase or cover a major expense. You can also use the money to invest for your future, or build your credit history.
But as you know, it also has disadvantages. Each monthly payment is charged with an interest rate, which means that you are paying more than what you borrowed. This is how the lenders earn from lending money.
Problem can also start when you are unable to do fulfill your financial obligation, and you miss out on payments. You’ll be charged with penalty fees, and because you’re deep in debt, you are likely to take on another debt to pay for the first one. But instead of resolving your problem, it only buries you deeper in debt. And this is how you get into the debt cycle.
To help you escape the cycle, here are the steps that you need to follow:
Step # 1 – Admit that you are in a debt cycle
You can’t get out of this cycle if you don’t admit to yourself that you are inside it. You need to realize and recognize that you have too much debt than you can handle. Do not be afraid of getting judged by others because your focus is to get yourself out. What others think about you should be the least of your concern. Once you admit this to yourself, then you can take the necessary action to end the problem.
Step # 2 – Evaluate your finances
The next important step is to understand where you are financially. You need to determine these two major aspects of your financial standing:
- Income – The total amount of money you make in a month not only from your primary job but from all your side gigs, part time jobs and businesses if you have any
- Expenses – These should include both your fixed and variable expenses you have each month
To help you track your expenses, here are some suggestions you would want to consider:
- Keep all receipts and transaction slips
- Carry a notebook and write down each expense that you make
- Record expenses using a spreadsheet on your laptop of mobile device
Step # 3 – Create a financial plan
Now that you know how much your income is, and how much money you’re spending, the next step is to create a financial plan. To do this, you need to formulate a budget that you can comfortably live with.
Start by listing down all your basic needs such as housing, food, utilities and transportation. Then make another list that includes your other expenses.
Aside from the expenses, you need to determine how much to allocate for debt payments. Calculate the total amount of debt that you have, determine how long you want to resolve it, and include this in your budget.
For example, you have a total debt of $2,500 that you want to resolve in 3 months. This means that you need to allocate a $833 per month plus the interest rate and other cost. Of course, the amount will vary depending on your income, and the loan terms.
Step # 4 – Go on a “spending diet”
It’s not possible to resolve your debt if you continue with your lavish lifestyle. In order for you to become debt-free, you need to go on a spending diet, which means that you have to lower your expenses in all areas where this is possible.
Here are some tips to help you:
- Stop using your credit cards
- Cook at home more often
- Wait for at least 24 hours before making a major purchase
- Ride a bike or walk to work
- Reduce usage of electricity at home
- Make a grocery list before going shopping
- Stop making unnecessary purchases
- Avoid impulse shopping
Step # 5 – Earn more money
Aside from lowering your expenses, it’s also important to earn more money. This will enable you to cover your needs, and get rid of debt more quickly. Just make sure that you don’t sacrifice your main bread and butter.
Here are some earning opportunities to consider:
- Working as a freelancer online
- Answering online paid surveys
- Doing small paid gigs online
- Renting out an extra space in your house at Airbnb
- Getting a part-time job
Getting out of the vicious cycle of debt can be difficult, but it’s not impossible. Use these strategies to become debt-free in no time.