According to the American’s Debt Help Organization, Americans are drowning in debts. Common ones include student loans, credit card debt, Auto and mortgage. To be in debt feels strangulating. It does not create a peace of mind at all. This is because of the uncertainty that comes with being in debt. Without some ways to get out of debt, it can damage your credit score. Or worse, makes sure you never get to borrow a loan again in a long time. Not to mention the stress when debt collection agencies come calling.
So, is debt good for the average working class American?
Well, this week’s post is not to dissuade you from borrowing from financial institutions. Sometimes, life problems are inevitable. Life happens. That is understandable. So, I would not advice against borrowing a loan when it is needed. However, it is important to always correlate your monthly income and expenses to the amount of loan borrowed.
For example,
If our monthly income is $2000 monthly, there is no reason for us to borrow a loan to pay for a Mercedes, a BMW, a Dodge, a Jeep or a Toyota truck. This is because a car note for such brand of cars is expensive.
On a $2000 monthly income, it is going to be difficulty for us to afford the monthly car payment since we have other monthly expenses. These expenses include monthly insurance, rent, utility, gas and food expenses.
Right, dear reader?
Let us be honest. American financial institutions have made it possible for anyone with a steady job, a good credit score and monthly income to finance products within reasonable range. However, it is not a reason to take that for granted. We can mess up our Art of Living by getting buried in debt.
Well, I assume you are already in some debts since you are reading this post. Do not worry, I am going to show you how to get out of your debt. It depends on you though. So, do not just read and forget. Apply these and free yourself from the shackles of your debt.
Ways To Get Rid Of Debt
Here are the quick ways to get out of debt.
1. Stop Adding To the Current Debt
At times, we are stuck paying multiple loans. It may be a result of borrowing a loan when we are already in debt. This is a very bad idea, especially for people whose debt greatly exceeds their income. An additional debt adds to your net debt. As a result, it keeps getting hard to make payments on each.
To avoid this issue, stop borrowing loans when you are in debt. This includes credit cards, small or big loans. For example, the borrowing of $150,000 for a house with an outstanding debt of $40,000 is a bad idea. Let us assume your annual income is $60,000. It is not a good decision to borrow the $150,000 in addition to an outstanding debt of $40,000. Besides the monthly payments of both debts now, the interests alone are enough to make sure you spend decades paying them off.
Moreover, you may never pay it off in your life time with that annual income in the presence of a big family dependence on you. Would you be happy transferring the debt to your partner or family in case of sudden death?
Personally, it is not fair at all. That is why it is advisable not to borrow any loan while you are in debt. Pay off your debt, then borrow the next loan.
Furthermore, do not pay off a debt with a loan. I am mentioning this , because I used to have friends that tried to pay off a debt with a credit card. This was against my advice. They ended up maxing out credit cards. As you can imagine, it did not help at all with their debts.
They paid off the itching debt, but they buried themselves in a bad one with a high interest rate. So, desist from the temptation of using a loan to pay off debt.
Finally, this is the first step towards paying off your debt. It helps you stop accruing debts. You can focus on paying off your current debt without piling more on it.
2. Arrange A Monthly Payment
To pay the whole amount of your debt, it may cause an upheaval in your Art of Living. I know there is a great urgency to be free from the shackle of debt. But, let us be realistic.
You do not want to put yourself in such a position where you cannot take care of your other monthly expenses. This is why it is important to arrange a monthly payment towards your debt with your creditor.
To begin, call your creditor and ask for a monthly arrangement where a certain percentage of your debt is paid. A bank can help you out of debt, if your creditor is a bank. The percentage is going to be within acceptable limits to you. Meaning- something you can afford without hindering other bills from getting paid.
To illustrate,
Let us assume that a single man has a student loan debt of $30,000. Now, he is a graduate that makes $55,000 annually. After tax, he comes home with $45, 518. This is based on an effective federal tax rate of 9.59% with a no state income tax. It means the man makes $3,793.17 monthly. And, he wants to pay off his student loan debt. Now, let us assume these are the monthly expenses he has to consider prior to a monthly payment arrangement with his creditor:
- Rent = $700
- Food = $1200
- Car insurance = $120
- Health insurance = $150
- Fuel = $160
- Light = $120
- Water = $50
- Miscellaneous = $300
- Total monthly expenses = $2, 800.
If his monthly expenses are $2800, it means he has $993.17 left. He can choose to arrange a monthly payment of $900 with his creditor which will pay off his $30,000 debt in two years, nine months and a week. Or, he could go with an arrangement of $300 monthly which puts him at eight years and four months. But, it saves him $8,318.04 annually.
Imagine this amount tackling reasons why you may need an emergency fund.
Whatever it is, we know this man cannot arrange to pay more than he has left monthly after expenses. If he chose to pay exactly $993.17 as an arrangement with his credit, he would not have any extra money left monthly. An huge unforeseen circumstance in life can wipe him out financially.
But, check this out. In the eight years and four months it will take this man to repay $30000 with $300 monthly payment, he will save $66,544.32! Pretty neat, huh?
That is why it is important to arrange a monthly payment to your creditor in a way that will not leave you financially broke each month. Do you understand now?
Additionally, set the arranged monthly payment to be deducted from your bank automatically. It reduces the chances of missing a payment date. You do not want to miss an agreed payment date with your creditor. This is because they can report you to the Credit Bureau. Such a bad report of missed payment can severely affect your credit score and cripple your borrowing rights.
That is why it is important to arrange a monthly payment that favors you. Not only favors you, but makes things convenient for you and your lifestyle. Follow this practical way to get out of debt.
3. Minimize Monthly Expenses
This is one of the practical ways to get out of debt. This is because it frees up extra funds to be directed at your debt. It starts with a budget. A budget gives you an approximation of your monthly expenses. It is this estimation that tells you what needs to be cut out of your regular monthly expenses.
To elaborate,
Let go of unnecessary expenses. Tabulate your monthly expenses and arrange them in the order of their importance. Then, separate the needs from the wants. In this case, I would recommend exalting needs above the wants. This is because you can live without your wants, but it is hard to live with the needs during the period of debt repayment to your creditors.
For example, you can survive without eating out at restaurants. You can cook your own food. Cooked foods are way cheaper than eating out in a restaurant. Besides paying for your food and tax in a restaurant, you have the tips too. At the end of a meal, you would have spent $30 to $50.
This is an equivalent of a week or two worth of foods that you could have cooked in your kitchen. Would you agree?
So, limit your monthly expenses in order to pay off your debt. It will not hurt to eat Ramen noodles for awhile, although I know you could get cheap health uncooked foods from HEB for less. I do it; I survive on $85 biweekly. My two weeks grocery supply costs about $85. They do not get finished until two weeks or so.
Prior to cooking my own meals every day, I used to spend $150 to $200 weekly on restaurant meals. Today, I save about an average of +$70 weekly on foods. Even more, +$280 monthly and +$3360 annually. That may not be much savings, but it can take care of some problems. So, I know what I say when I advice you to cook your own food during debt payment to creditors.
Besides curtailing restaurant expenses, you can minimize some other aspects too. You can learn ways to cut your electric bills. You can also hold off on buying clothes, game consoles, shoes and other wants that are not necessities. At least hold off, until you have reduced your debt in such a way that it no longer poses a problem to you.
4. Seek Additional Means of Income
In cases where the debt amount owed is greater than income, it is difficulty to pay off the debt without disrupting the Art of Living. In such a situation, the basic needs of life becomes incredibly hard to maintain. Here, I mean food, clothing and shelter. To avoid such an abrupt disruption of life, seek additional means of income to supplement the dwindling monthly income.
Speaking of additional means of income, get a second job. Maybe a part-time one. It will help you make more cash available to you. It will not only place more cash to you, but also makes sure you have enough to support yourself without seeking aid. This is especially in a large family setting. If you are the head or guardian of a huge family, this will help you immensely.
I know what you are thinking right now. You do not have the time for a part-time hustle, do you?
Well, that is not true. Especially when you have one job with an eight hour shift. Let me break it down for you.
Here: there are twenty-four hours in a day. If you sleep eight hours out of it, you still have sixteen hours left. A normal job’s shift is eight hours. Meaning, it could be 6am to 1pm or 9am to 4pm. Whatever it is, you will have eight hours remaining that are not for sleep or work. So, what exactly happens in those eight hours?
That is what you have to figure out and use to create additional means of income to you. It could be working extra six hours shift to earn extra income. Or, using it to sell your products. You know whichever works best for you.
Personally, I go to school full-time, work full-time and run a few businesses full-time. So, you cannot tell it is not possible. In the United States, it is very easy to work double jobs while in school. It has to do with your time management, so figure it out and work with it to get out of debt.
5. Withdraw From Your Retirement Fund
Do you know it is possible to withdraw from your retirement fund?
Until 2018, I did not know about it. You are allowed to take money out of your retirement fund. However, it is taxed. It is taxed for people who have not reached retirement age. As you know fully well, Uncle Sam will take His 10% out of what you decide to cash out.
So, be aware of that.
Since you are withdrawing from your retirement fund, be aware that means taking out money from your future older self. I will advice you to make sure you replace the money. There is no reason why you should not, after debt payment to your creditors. Save the amount you took and put it back.
To emphasize, let this be your last resort when the other ways to get out of debt is not fast enough to calm your creditors. The last thing I want for you is for you to be financially broke at the age of sixty, because you spend all your retirement fund repaying debt. That will be one hell of a ditch that you may never crawl out of.
To conclude this week’s post, I applaud your decision to pay back your creditors. It shows you are a person of great integrity. Also, I advice you to plan the means of payment using the practical ways I explained here, before meeting your creditor. To finish off, always correlate your monthly income and expenses to a potential loan before you borrow. Make sure you do not borrow, while you have outstanding debt!
With that said, I hope you knock out your debt!
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