How to get out of debt
A big concern for a growing number of Bahamians is accumulating unwanted debt. Being in debt can be a stressful experience, no matter your circumstance. The fact of the matter is, if you signed for a loan, you are obligated to pay it back, even if you have a life-altering experience, like losing a job, getting into an accident or have increased expenses due to having a child.
Sometimes debt can just be an unintended consequence of too much holiday and social spending. It can also be a result of overspending throughout the year. There are so many people who are getting out of debt every single day, and not only that, but they are getting out of debt in a short period of time. Getting out of debt is possible and can be done with a well thought-out plan. Here are five steps that can prove helpful:
1. Stop borrowing money. If you want to get out of debt fast, you have to stop using debt to fund your lifestyle. This means no more financing furniture, no more signing up for credit cards and no more vacation loans. One should only get a loan when that is the only option for something that is much-needed. By refraining from borrowing unnecessarily, you will focus solely on the debt that you currently have and develop a game plan to pay it off quickly.
2. Establish a starter emergency fund of $1,000. You might be wondering ‘Why is having an emergency fund important?’ Well, if you don’t have any money in the bank and an emergency does happen, how are you going to pay for it? If you are trying to get out of debt, then you need to put a buffer between you and debt. That is exactly what an emergency fund does.
3. Create a realistic budget and stick to it. Developing a budget that tracks your income and your expenses is crucial to getting out of debt in a short period of time. It will help you gauge where you are with your finances so that you can move forward toward your goal. Creating a budget will expose whether you have money left over, which is called a surplus, or if you are in the negative, which is called a deficit. The goal is to increase your surplus and use that money to pay down your debt.
4. Organize your debt. This is paramount to mapping out a plan to pay off your debt. There are two approaches that are worth considering. The first is where you list your debts smallest to largest, regardless of the interest rate. This way you will know which loan is of the highest priority. Once you have this list, then you organize how much you will contribute to each loan in percentages. It is safe to say that you can allocate between five and ten percent of your monthly salary to the highest priority loan.
5. Throw any excess cash at your debt. When getting out of debt, there will be times when extra money falls in your lap. Fight the urge to spend it on something that is a want. Instead, use it to tackle your debt. Some good examples would be selling a car, an inheritance and winning that four ball number. The more cash you can put toward your debt, the faster it will disappear. Debt doesn’t have to be forever. Develop your financial game plan and start your journey toward being debt-free today.
Every step you take to improve your financial life will help improve your life down the road. You have to make the decision to take control of your own money and your own life, because the reality is, no one else is going to do it for you.
• Quinton C. Lightbourne is a certified financial planner with the Chartered Institute of Bankers in Scotland and vice president of the Bahamas Investments & Securities Business Association (BISBA). E-mail: firstname.lastname@example.org.