Staying out of debt seems to be a straightforward process; just don’t spend more than you can afford. But you know that it’s not that simple. Emergencies, expectations, needs, wants, easy financing, misguided payments – all these easily and slowly lets us slide into debt and conspire to keep you in debt.
Know the Tell-Tale Signs of a Debt Trap
- Creditors call you to collect payments.
- You only make minimum payments on your credit card bills. So? An initial small debt will eventually turn bigger as time passes and interest piles on. And it may take years to pay off the entire balance.
- Every month, you are using your credit card to meet the cash shortfall.
- You have been rejected new loans or new lines of credit because either your debts are too high, or you have damaged your credit history. Or both.
- Your bank account is practically empty.
- After paying off all the bills, you have no money for little extras like ordering food or watching a movie.
If these signs are apparent in your life, it’s time to look at a few ways to dig out of debt. Here’s how:
1. Cut down the cost of debt
One of the reasons you can’t easily get out of debt is because you have too much debt. And the debt demands to be serviced every month. That means you have to feed a major chunk of your monthly income towards paying your debt. That leaves very less money for you to spend on your living expenses, coaxing you to use your credit card for the cash shortfall.
Cutting down debt is difficult but it’s definitely doable. This is how you can make it work:
- Slash spending to the bone and then divert all the cash you have towards paying the highest cost debt.
- Look for finance options – get a low-interest personal loan for debt consolidation or borrow from a family member.
It may not be easy or comfortable for you to do this. But once you see your bigger debts disappearing, you’ll have some breathing space to take stronger strides towards being debt-free.
2. Reduce the cost of living
There may be factors beyond your control that contribute to the debt. Essentials like housing, healthcare, education and cost of living are high and are disproportionate to your income. The point here is not to justify the overspending, but to identify areas where you can budget and give serious consideration to downsize your lifestyle. It may mean eliminating or reducing some services that you’ve gotten used to over the years, such as dining out, ordering food, cable TV subscriptions, cell phone packages, etc.
3. Evaluate your wants and your needs
Many of us confuse our wants as our needs. For example, you may see exchanging your old car for a new one every 5 years as a need, justifying it that it will cut down the car repair cost. But in reality, this is a want, not a need.
If you want to avoid the debt trap, you need to constantly evaluate the wants vs. needs equation. Don’t spend your money, if it’s not a need. Your wants can wait.
4. Increase your income
Your debt is usually because of the imbalance between your expenses and your income. One of the ways to fix this problem is to lower your expenses and increase your income.
- Get a part-time job.
- Start a side business such as tutoring, freelance writing work, etc.
A long-term solution is to increase your market value. Add skills and update your knowledge to either get promoted to the next level or find a better paying job elsewhere.
5. Make an effort to save and build an emergency fund
You may cut down your expenses and increase your income, but if you don’t build up enough savings you may be forced to take up debt again.
Initially, when you begin to pay your debt, you may not have enough money to save. But as your debt gets smaller, you’ll have more money at your disposal to keep aside as savings. Aggressively transition from a debtor to a saver.