Debt is a controversial subject. Some people advise that debt is important while others say the opposite. What we all agree on is that good debt is good but bad debt is dangerous. Here is how to get out of bad debt.
There are even religions that prohibit their faithful followers from taking debt. Some financial advisors also advise their clients to avoid debt as much as they can.
I want to rest that case with this article. Debt is actually good and bad; it all depends on what you use it for. When you use debt to make more money, that is good debt. If you use debt to get more comfortable by consuming more, that is bad debt.
Good debt can catapult you to financial abundance and freedom. This is called using other people’s money to grow your financial base. Financially independent people are masters at this; they thrive through taking good debt. This creates financial leverage for them.
Bad debt, on the other hand, brings financial distress in your life, if not bankruptcy. I have seen people spend 10 years on debt that was never beneficial to their financial wellbeing. This is one of the worst forms of slavery ever. It demoralizes you to the core. Imagine 80% of your salary being deducted for 10 years. You will become very demotivated to work. It will be hell on earth.
Therefore, to avoid all these, make sure you only take good debt.
Good debt is invested in projects whose return on investment is greater than the interest rate on the debt.
When you realize that your debt is bringing financial distress to you, that is actually bad debt. Good debt is supposed to repay itself. As we said, the ROI is supposed to be higher than the interest rate. This means that the debt brings more than it consumes. This can only happen if you make prudent financial and investment decisions and up your debt management skills.
When you realize that you are in bad debt, do not condemn yourself. That is not the end of the road. Human beings can arise from any situation. The process of rising will be costly but it is worth it. Otherwise, if you do not take action to revert the situation, you will end up in bankruptcy. This is not a situation any of us would like to be in. It is shameful, depressing, and inhumane.
How to get out of bad debt
Here are some of the actions you can take to get out of bad debt.
1. Make more money
This is the surest way of getting out of bad debt. However, it is never easy to make more money especially when you are in financial distress.
When you make more money, you will have more money to repay your debt on time. The earlier you repay your debt, the better. This is because interest repayments accumulate with time. The more the time you use to repay, the more the interest payable.
If you look at the formulas of calculating the amount payable of debt, you will find that time is a common factor. The formula can be simple interest or compound interest. Both of them are affected by the time factor.
Therefore, making more money can help you repay your debt on time and avoid interest accumulation. What can you do to make more money? Here are some of the tips:
- Get a side gig. This is a part-time hustle that brings you income. You can use the extra income to fasten your debt repayment.
- Ask for a raise. If you are a salaried employee, you can also ask for a pay raise at your place of work. The extra income will go to debt repayment.
- Get a higher-paying job. This is also a viable option. If you have some years of experience, getting a better job is not hard.
- Get another debt and invest prudently to earn more money. The income from this debt should be used to repay the bad debt. Make sure that the new debt is good debt that brings income.
- Get financial intelligence. To make more money, you have to get more financial knowledge. You make more money when you get more knowledge of money.
If you can get more money, debt repayment will be quite easy.
2. Pay more than you have to pay
To get out of debt faster, you have to prioritize debt repayment. Pay more than the minimum debt repayment amount. This will save you time. As we pointed out, more time means more interest accrued.
Pay as much as you can every month to reduce the interest payable. This will help you get out of bad debt faster and save money.
3. Spend less money
When you realize that you are in bad debt, it is time to live frugally. Live on a bare-bone budget. This is where you live on as little as possible for as long as you can.
To do this, you can do the following:
- Relocate to a cheaper house.
- Avoid impulse buying.
- Buy only necessities and not luxuries.
- Use a smaller car or even public transport.
- Avoid unnecessary donations.
- Avoid expensive hotels by cooking and eating at home.
- Make your family understand the new austerity measures.
As you spend less, you will have more left to repay the bad debt.
4. Sell your liabilities
Liabilities are things that reduce our economic value. This means that they take away money from our pockets. This can be a car, investments that make losses continually, etc.
When in debt distress, you can sell your liabilities. This will give you more money to make debt repayments. It will also save you money. After all, liabilities cost money to sustain.
You can choose to sell your car. This will give you a lump sum to repay your debt. It will also save money for you on fuel and service costs.
5. Renegotiate the terms
This is a method that is less known by individuals. However, businesses do this all the time.
If you are unable to repay your debt fully and on time, you can visit your banker and renegotiate the loan. Here, you are seeking to change the terms of repayment to your favor. The best you can do is to ask for less interest on the loan. Even a single point less on the interest rate can save you thousands or millions depending on the size of your loan.
Asking for more time does not have much impact because of the following reasons:
- It will increase the interest payable. Remember that time is a factor in calculating interest payments. The two have a direct relationship. When the time of repayment increases, the interest payable will also increase.
- It will only push the liability into the future. This article is about getting out of debt and not postponing it. Pushing the liability into the future does little to impact your financial wellbeing.
Visit your banker and explain your financial situation to them. Most banks will not hesitate to give you better terms. However, beware not to be losing even more. After the restructuring of the loan, you should pay less and not more.
6. Use the debt snowball method
The snowball method follows the following steps:
- List all your debt obligations from the smallest to the largest.
- Use all your extra income to repay the smallest debt when making the minimum payments on the big debts.
- When the smallest debt is fully repaid, do the same to the other smallest debt.
- Repeat the process over and over again.
The snowball method clears the small debts first to enable you to focus on the big debts. It is a method worth trying.
7. Allocate found money to debt repayment
Found money is income that you get unexpectedly or away from your main income sources. This can be money from an inheritance, gifts, bonuses, lottery, annual raise, etc.
All these forms of income should be used to repay your bad debts.
Final thoughts on how to get out of bad debt
Here is how to get out of bad debt. With these 7 steps, you can easily clear your bad debt and get out of financial distress with time. The next time you get into debt, be sure to get good debt. As we pointed out, good debt is defined by its use. This calls for proper debt management.
Founder/ C.E.O- Wealthy Wolves Consulting & Giimark Ltd/ Best-selling Author/ Speaker.