How to get rid of your debts
In my "Budgeting to become debt-free" post, we discussed the monster of it all: debt.
The first step in refusing to get into debt is to hate it. I personally hate debt, I'm even afraid of it; I think of it as something forbidden. If I were to compare it to something, I'd say it feels like selling my soul.
This doesn't mean that whoever has debts has sold their souls, it means that you should start to look at debt as a monster, as something that will crush you. Would you ever bring a monster into your home? Or would you let your children handle this monster when you're not strong enough (financially) to do so? Or would you let it crush and defeat you and be your lifelong master forever?
Well, I can't answer that from your side, but I have a pretty good guess that the answer to all these is NO!
So the first step for becoming debt-free is to change your mentality about it. This way you stop yourself from getting further into it.
Now let's talk about the monster in the room. So you already have debts and you made the smart decision to finally get rid of it. How would you do that?
I have devised a 3-step plan for you:
1) Income,
2) Monthly expenses, and
3) One-time expenses/debts
Using this approach, I managed not only to handle my daily life but also to save a substantial amount of money. Let's explore this plan further. The first step involves recording your or your family's income on paper or in Google Docs/Sheets. Add up all the money you earn from work, side jobs, passive income, sales of items, inheritance, tax refunds, and so forth. The next step is to calculate your fixed monthly expenses, including rent, utilities, subscription services, health insurance, medication, etc. Total these amounts to get an overview of your necessary spending. You'll also need to allocate some income for groceries. The third and final step is to list lump-sum expenses or any debts you owe.
For example, imagine your monthly income is 2000 bucks. Your rent is 500, sum of all utilities is 150, and you pay 40 bucks for Netflix/ChatGPT. You are living alone so your monthly grocery expenses is around 300-400. Now you got a loan from the bank or borrowed some money from a friend, let's say 2000 bucks.
Your income (2000) - Rent (500) - Utilities (150) - Subscriptions (40) - Groceries (400) = 910
You'll have 910 dollars at the beginning of the month. This next step is crucial: stop purchasing things you don't need! I'm serious, just don't! I prefer not to call it consumerism because I believe we only live once and should enjoy life as long as it doesn't harm anyone or anything. So, if you want that iPhone 16 or the $200 earrings you saw recently, you absolutely deserve to treat yourself, BUT those purchases can definitely wait. If you want to constantly live with the burden of debt and the anxiety that it might overwhelm you someday, feel free to do so, but you're here for a reason, right? To break free from it, so let's get started.
You need to be strategic and precise with that 910. There are two options for paying your 2000 bucks debt: you can pay it off quickly, which might increase financial and mental pressure, but you'll avoid anxiety in the coming months, or if you prefer to save some for yourself, you can slow down the payment rate and enjoy some of it. Personally, I prefer to eliminate one-time expenses as quickly as possible so I don't have to worry about them later. Like with this 910, I plan to pay off my debt in 2.5 months. However, you could, for example, allocate 500 of it to your debt and use 410 for other activities like going to the movies, bars, or buying things you enjoy.
Ultimately, the decision lies in weighing the immediate benefits of quick debt repayment against the potential enjoyment and flexibility that comes with a more gradual approach. By carefully considering your financial priorities and personal values, you can create a plan that works best for you, ensuring that you remain on track to achieve financial stability while still enjoying the present.
As a courtesy, I will leave you a sample of my own plan down below, you can download it, modify it, and get a good head start. The functions and formula are there, you just need to insert your income, fixed expenses, variable expenses and you debt/saving goals.
As always, if you have any questions regarding how to manage your finances, write to me in the contact form below and I promise it's completely free:)
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