Managing one's finances is a skill that should be incorporated in the national education syllabus, but is unfortunately not.
Every year, thousands of adults and families fall into deep debt troubles, and some of them, even into bankruptcy, after making poor financial choices.
The below are some tips to get out of debt from American personal finance personality Dave Ramsey, who lost his US$4 million real estate fortune in his 20s, and recovered to build a US$200 million net worth today, at 60-years-old.
1) The snowball method
You may have heard of this term, a lot. It basically refers to a debt-reduction strategy which involves paying off the debt from the smallest (amount) to the largest. For this, you have to list your debts from the smallest to the largest, regardless of their interest rate.
Next, you make minimum payments on all your debts, and pay as much as possible on your smallest debt. Once your smallest debt is paid, you take the money you were putting toward that payment and roll it onto the next smallest debt owed. Keep doing this until each debt is paid in full.
2) Live frugally
One of the main causes of debt is living beyond one's means. Set a budget to live on monthly, and put the remainder aside as reserves for an emergency or as retiremend fund. If repairs crop up at your home or vehicle, try Googling it or finding solutions on YouTube, as the problem may be one that you could solve by yourself without paying a hefty bill for a handyman. If the issue is really beyond your scope of skills, try asking around for family or friends who could do it for cheaper.
Ramsey recommends the zero-based budgeting method, which involves you allocating all your monthly income to expenses, savings, and debt payments, so that the income minus your expenditures equals to zero by the end of every month. The purpose of this idea is to give every cent a purpose.
The ideal recommendation would be to allocate 50 percent of your income to needs, 30 percent to wants, and the remaining 20 percent to debt repayment and savings.
4) Raise your income
Losing your job can be catastrophic, especially if you only have one source of income. Experts suggest boosting your income. This can be done by creating a passive income channel (rent, for example), starting a side hustle, cutting your expenses wherever possible, making money from your hobbies, or declutter your home and sell your stuff.
5) Ditch those credit cards
As useful as credit cards are, they are by design, made to make you spend beyond your budget. If you make minimum payments on your outstanding amount every month, the pending balance accrues interest at double-digit rates. If you miss a payment, you could be charged a late fee, which in turn, will affect your credit rating.
The above are some of the tips that may help you slowly pull out of debt, if practised diligently. What other tips do you know of?
Photo source: istockphoto.com
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