We previously discussed signs that you are falling into a debt trap. This was helpful for those people who may not have been aware the about the debt trap concept and that they may be falling into one. Whether you were already aware that your debt situation was out of control or are only making the realisation now, below are four simple debt management strategies you can implement immediately to help gain better control of your debt situation.
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Make a debt schedule
Most people resist putting anything to do with money down on paper, hence our great aversion to budgeting. The reason for this is because our finances are usually not pretty therefore we avoid putting the ugliness on paper as doing so forces us to face it. We therefore prefer to not think about the reality of our financial situation let alone write it down on paper.
If you make the decision to take control of your debt situation, however, it would be prudent to write all your debts down. This means writing down the who, what, how much you owe, how much you are paying and the interest being charged on your debt. Doing so is beneficial for two reasons:
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It helps you face the situation and not avoid it.
This is important psychologically because until you are willing to face the reality of the situation you are unlikely to commit to any plan to change it. Ignoring and avoiding the situation is how most people’s finances spiral out of control. There is a false belief that if you ignore the situation then it is not real or there is no problem to address. So by writing down your debts you are acknowledging that there is a problem and as they say that is half the battle won.
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It helps you plan better.
The best way to plan is to first have the full picture of the situation and writing down your debt gives you a full, clear picture thus helping you tackle the situation much better. You have been tackling your debt without ever looking at all of it and I’d bet you have not been successful so far. This is because without considering the holistic picture and looking at all the angles even a best laid plan is unlikely to yield the desired results.
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Reduce unnecessary expenses
Having written down all your debt, you will be able to prioritise your debt. You will then move into action by looking for ways to free up money to be able to clear the debt and get your finances under control. It is worth remembering that being in debt that is threatening your financial freedom means some damage has been done therefore to get out of the situation means doing some damage control. To get out debt you have to be willing to implement a debt damage control strategy. Damage control is not fun or a holiday. Damage control involves making hard decisions and making sacrifices.
If you understand this and remain committed to improving your situation then accepting that you will have to do without some of your favourite indulgences for a while will be bearable. Consider your expenses and see which expenses you can reduce or even eliminate for now while you’re working on getting back on track. There is usually not much that can be done to reduce the living expenses e.g rent/mortgage, electricity etc. Looking at other expenses however, it is possible to make adjustments that can free up some money to pay off your debt.
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Implement a debt management method that suits you
There are two debt management methods that you can use to clear your debt and help you gain your financial freedom; the snowball method and the avalanche method.
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The snowball method
With this method you prioritise your debt by size. The strategy then is to pay off the smallest debt first and as quickly as possible. For instance, if you had 3 debts of P2,000; P8,000; and P20,000 you would first pay off the P2,000 debt by making higher payments on it and only minimum payments on the other two. After clearing the P2,000 debt you would use the freed-up money to pay off the next smallest debt, the P8,000 debt in our example.
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The avalanche method
The priority here is to pay off the debt with the highest interest first. This is because high interest is more expensive. Using the 3 debt amounts in the above example, if the P8,000 debt had a higher interest, you would pay off this debt first. If the second highest debt was the P20,000 debt you would move to pay this debt off after paying off the P8,000 debt.
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Manage temptation while building discipline
This is an important step to take while getting your debt under control to avoid undoing any progress you make in managing your debt. It takes discipline to avoid slipping back into the old ways of getting into unmanageable debt. And it takes time to build discipline. The best thing to do while you are working on building the discipline is to manage temptation to slip back into debt. Though some of the access to debt cannot be avoided, you can manage temptation in these areas:
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Cancel your credit card/overdraft facility
You can cancel your credit card or overdraft facility to remove the temptation of swiping without a moment’s thought. By removing the access you will not have to work on your willpower to resist the temptation. You simply will not have the means to buy what you want to buy. This is a good strategy because it allows you to focus on paying off the debt without undoing your progress at the same time.
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Reduce the number of your access to credit facilities
Let’s say you have a credit card and 4 store credit accounts. This means you have five different options to satisfy your impulse purchases and it is no wonder you find yourself with such ease and no regard for the consequences that await you later. What then ends up happening is you find yourself at month end having to ‘share’ your hard earned income with a long line of creditors. If you reduced your access to credit by say cancelling the credit card, and closing down one or two of the store accounts you will be left with just two. This means you will have few creditors to deal with at month end and eventually you will train yourself to survive on limited access to debt.
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Reduce the limit on your credit card or store credit accounts
Another option that works well especially in the beginning when it is hard to let go of access to debt is to reduce the credit limits on your credit card and store credit accounts. This helps you to manage how much you can take in the form of debt and while building the discipline to avoid debt it helps you avoid biting off more than you can chew.
There are a number of debt management strategies that you can start implementing to help you manage your debt, no matter how out of control you believe your situation to be. There is no situation that is beyond help and in any case not doing anything to address the problem is only going to make the situation worse than it already is. However, it all really begins with how badly you want to improve your financial situation therefore your commitment to the process is the main ingredient.