Paying off debts should start with the right frame of mind and here’s a list of 5 questions, answering which will help you create just that.
Will my debt repayments fulfill my financial resolutions?
What you do to get off the creditors’ hook, make sure you achieve your financial resolutions. To make things normal, you’ve got to make smart uses of resources to manage your money and be financially healthier.
Set tangible goals and allot the means you’ll employ to achieve them. Take for instance, you want to raise your new home’s down payment amount, then it’d be ill-advised to exhaust all your savings to pay off your debts. However, you’ll also have to make sure your indebtedness is low so as to qualify for the most lucrative loan possible to buy that home.
In that case, you may use your savings to pay off your debts but with caution.
Did I create a financial cushion to meet unplanned expenses?
If you fail to plan for unplanned (emergency) expenses, then you’ve planned to fail in paying off your debts. An emergency fund is an absolute must before starting to pay off your debt obligations. Use the excess amount for debt repayments left after paying for your daily living costs and contributing to your emergency fund. It's a sustainable approach to get relief from your debts.
You can liquidate your emergency fund to pay for the unplanned expenses and prevent a major financial disaster from destabilizing you financially any further, while you continue making your monthly debt payments unhindered.
What is my actual debt scenario like?
Before you begin to pay off your debts, you should have a clear picture of your present debt scenario. To start with, you must create a list of all your debts and the respective interests charged on them along with their creditor’s name, payment deadline, etc.
Your first priority would be to pay off high-interest debts like credit cards or payday loans. Paying off these costly loans will free off a lot of disposable cash in your hand.
Sometimes, you may use your savings to pay off those debts that levy interests more than what you earn through your savings account. For example, a credit card charges 28% on your balances whereas you earn a meager 15% on your savings account. It’d be a better to pay off the outstanding balances of that credit card using your savings. This way you free up 13% extra cash as interest amount paid to the creditor.
Do I expect a financial windfall?
If there’s any extra income you’re expecting in the near future, then what are they? This could be a guaranteed commission for your excellent performance at work or a tax refund or a bonus vacation package, it could be anything that either saves you more money or provides you with extra dollars. Use that extra dollars to make larger debt repayments and become debt free faster.
Where will I get the funds to pay off debts?
According to Equifax, in 2015, an Average American consumer, aged between 15-25 years, owes $10,552 on her/his student loan, whereas, American consumers, in general, owe $665.8 billion as credit card debt.
You need to have a substantial amount of dollars as savings to meet your daily living expenses, besides paying off your debt. Your debt will erode your retirement fund to a great extent. It’s a foolish idea to use your retirement funds (if you have any) to make the debt repayments other than bear your retirement costs. Rather, you need to think of novel ideas to increase the amount of disposable cash in your hand and thereby, savings.
You'll have to make some serious sacrifices.
1 You’ll have to give up living a life that strives to keep-up-with-the-Joneses. Double check your shopping list (be it grocery or otherwise) and slash items that seems not too necessary. Even if you save a couple of dimes at the grocer’s store, you could feel entitled to binge on a coffee at the Starbucks or a pack of munchies. Don’t do that. In either way, you don’t want to lose your dollars on unnecessary items.
2 You’ll have to stop entertaining the financial frenemies (financial friends + enemies) in your life. These frenemies could come in the guise of your beloved colleague or relative who at the drop of a hat would ask you to throw a party. Just be honest and decline from doing so in a stern but polite voice.
3 Create a budget and stick to that. Take an expert’s help if needed but make a good one and follow it. Your budget will help you to track your monthly expenses and savings.
Your budget is your tool that will help you pay off your debts as planned and remain financially healthy throughout your life.