There are many reasons why people get into debt. Being financially illiterate, poor money management skills, not able to say no to instant gratification, overspending, and of course genuine reasons like unemployment and having unexpected expenses can place a person into a debt situation. Personally, I got into debt awhile back due to poor money management skills, impulse buying, and on a deeper level, my overspendings were due to insecurities issues, and a lack of purpose in life.
1) Make getting out of debt a commitment
Getting out of debt is more of a psychological issue than anything else. It is useless if you have the best method/ system for getting out of debt but are unable to stick to it. Decide once and for all that you are sick and tired of debt. No one likes debt repayment. It is painful, but since you have dug yourself into such a hole, the only thing you can do is to repay your debt as soon as possible. Think of all the extra money you will have once your debt is fully repaid. You then have the freedom to use the spare cash to do whatever you want, without guilt.
2) Develop a budget
Now that you have put your heart and soul into debt repayment, work out your monthly income and expenses. Cut all unnecessary expenses such as shopping, excessive entertainment, eating out at restaurants, and you even have to cut down on vacations until you clear your debt. Yes, it is depressing, but now is pay back time for using money you have not earned to pay for things which you do not need. By developing a budget, you are able to track and cut spending, and to allocate extra money towards debt repayment.
3) Debt repayment
After coming up with a budget, you should be able to know how much money you are able to repay each month. Make sure it is more than the minimal payment required. If you have more than one card, always allocate a higher payment towards the card with the highest balance. Compared to paying the same amount for all cards each month, I personally prefer making more payment towards the card with the highest balance to save on interest charges. Another way is to do debt consolidation using ready credit or a personal credit line, with an interest rate ranging from 4% to 12% per annum. Do shop around for the best rate between different banks. For myself, I am using the debt consolidation method with Citibank’s ready credit at a rate of 4% p.a.
However, the drawback for using the debt consolidation method is that you would not be able to make a lump sum repayment due to fixed monthly installment. Also, there are penalty charges for early repayment.
4) Life after debt repayment
It can be really depressing to just focus on the debt repayment process. To encourage yourself, start planning on how to allocate the money once debt is fully repaid. You might want to go on a vacation to celebrate, or to start saving up for your goals. Regardless of what you do, it is important not to fall back into debt again. Learn to manage your money, save up, and plan for retirement.
Good luck and do stay committed!