Hello!
Seiiti Arata.
Are you in debt?
Do you owe money to banks, loan sharks, or even your family and friends?
Today’s conversation is aimed at people that are in debt or that took different types
of credit agreements and that want to know how to organise their money better.
It’s important to know how to build a financial plan.
Without a good plan, we make bad financial choices.
We might try to pay off our debts, but in the end they always pile back up.
Even if you don’t earn much, it’s possible to pay off your debts.
However, without a smart strategy, you run the risk of wasting your time, energy and
sometimes even more money.
With this being the case, I’d like to show you a basically flawless 9-step strategy to
help you pay off your debts and make sure that you never end up in the same situation
again.
Before looking at the nine steps, it’s important to understand exactly why you’re in debt.
People get into debt when they spend more money than they earn.
This usually happens when they take on credit that they can’t afford to.
For example, you might want to buy something that costs a grand, but you don’t have that
kind of money today.
You are offered a deal in which you only pay one hundred today, and the rest of the course
is spread across 11 instalments.
This might seem like a good deal, but at the end of the credit contract, you’ll have
paid one thousand two hundred for something that only originally cost a grand.
The extra two hundred serves as a sort of interest, because the company leant the money
to you.
At the start of the contract, that isn’t much of a problem.
The true problem is when the debt starts to build up and grow out of control, in a sort
of snowball effect.
You might have already seen how compound interest can work in your favour when you’re consistently
investing your money on a monthly basis.
For example, if you have a grand and you invest 100 a month at an interest rate of 1% (one
percent) a month, in ten years time you would have 26 (twenty six) thousand.
That’s what happens when compound interest works IN FAVOUR of the investor.
If you were surprised by those numbers, just imagine how much more surprised you would
be to see what happens when the interest rate works AGAINST people that are in debt.
Although investments yield on average between half and one percent a month, interest rates
on credit cards, for example, can reach interest rates as high as twelve percent a month depending
on the country and the type of card.
In other words, a loan of one hundred on a credit card, with an interest rate of ten
percent a month, would leave someone in more than three hundred in debt by the end of one
year.
Triple the value of the loan in just a year.
It’s not just by chance that debt is one of the biggest problems that stresses people
out in our current society.
Debt can affect many other aspects of a person's life, such as their career, health and relationships.
If you want to avoid these stresses, read on to find out how to get out of debt in nine
simple steps.
Step 1: Adapt your budget to help you get out of debt
To get out of debt, the first thing to do is to make a financial plan.
This plan should begin by focusing on your household budget.
For example, let’s say that fifty percent of your budget goes towards your rent, and
that another ten percent goes towards each of the following areas: education, entertainment,
charitable donations, investments and long-term expenditure.
This would be a good budget if you weren’t in debt.
However, as long as you’re in debt, the distribution of your budget should be modified
so that you can pay off your debts as quickly as possible.
Firstly, highlight the expenses in your budget that you can get rid of without implicating
your standard of living too much.
For example, you could keep the fifty percent of your budget devoted to paying your rent
and bills.
You could also keep using ten percent of your budget to pay for education, as long as it’s
a course that can’t be reimbursed or given up, like university or your children’s education.
But the other forty percent that’s left over from our example should be used towards
paying off your debt.
It might be difficult, but it can’t be helped.
If you’re in debt, it doesn’t make much sense to spend money on entertainment, charitable
donations, investing or long-term expenses.
This doesn’t mean that you can’t enjoy yourself or give back to your community.
You’ll just have to be more creative in terms of finding ways to enjoy yourself and
to contribute without spending money.
It also wouldn’t make sense to keep investing ten percent of your budget a month, because
the interest rates of investments can be even higher than the interest rates of debt.
Don’t try to save money while you’re paying off debt
One of the main mistakes people make is to keep trying to save money while they’re
also trying to pay off their debts.
It’s common to see people that keep putting money into low-risk and low-return investments
at the same time as trying to pay off their debts, which have high interest rates.
It doesn’t make sense to keep paying high interest rates if you have the money to pay
off your debts.
What’s worse is when people get a very little return on their investments.
But why do people behave in such an irrational way?
It’s because they have a very low level of financial education.
Stop your debts from snowballing out of control
As a snowball rolls down the side of a mountain, it increases in size and becomes more and
more uncontrollable.
If you’re not careful, the same thing can happen with your debts because of the high
interest rates.
This means that the best thing to do first is to stop the snowball in its tracks.
When you’re in debt, it’s important to take the age-old advice of spending less than
you earn seriously.
The difference that you save can be used to stop your debts from growing.
Have a personal review.
Are you financially prepared enough to use a credit card?
If you don’t know how to control your money, it might be best that you cancel your credit
card.
For some people, it might even be best to use cash to pay for everything, and to divide
the money up into envelopes to be spent on rent, transport, food, and other essential
expenses.
Any money going towards expenses that aren’t absolutely essential should be used towards
paying off the debt.
Step 2: Make a list of all your debts
The second step to paying off your debts is quite simple.
You should make a spreadsheet and list all of your debts, including the following details:
How you got into the debt Who you owe the debt to
The monthly interest rates on the debt If the possibility of negotiating the interest
rate is low, medium or high
All of this information will prove very useful in step three, in which you will build your
strategy that will define which debts you will focus on paying off first.
Step 3: Order your debts from most expensive to cheapest
The third step is to put your debts in order, from the most expensive to the cheapest.
What I mean by this is that you should prioritise paying off the debts with high monthly interest
rates over those with low monthly interest rates.
Be aware that here we’re talking about the monthly interest on the debt, not the amount
of the debt itself.
In other words, to work out which debt is the most expensive to pay off, check which
has the highest monthly interest rate.
Step 4: Negotiate minor interest rates with each lender
Next, with your detailed spreadsheet at hand, get in touch with each lender, each person
or company that you owe money to, and try to negotiate with them.
Firstly, follow up on the loan sharks of the most expensive debts that you owe.
Move onto the next lender, until you negotiate the debt with the lowest monthly interest
rate.
This is the time that you’ll have to recognise your financial mistakes and try to negotiate
your debts.
Explain your repayment plan, show them the documents that you’ve prepared and show
them how much you can afford to pay off each month.
Depending on the case, most lenders agree to waiver the interest, because they are at
least making the money back that they initially loaned out.
You’ve already had the “no”.
At the very least, all that asking will get you is a bit of a discount on your debt.
It will really help in the long run.
After this round of negotiations, use your spreadsheet to calculate how much debt you
have left, including the discounts that you might have managed to negotiate.
Step 5: Update your outstanding balance and work out your average interest rate
The fifth step is to update your outstanding balance and make a weighted average of the
interest rates on all of your debts.
Any spreadsheet programme can calculate a weighted average.
It’s important to consider the weight of each debt in relation to the total amount
that you owe.
This information is essential for the next step: unifying your debts.
Step 6: Unifying your debts
With the total debt you owe after your discounts, look for a bank that will offer you a loan
for the full amount of your outstanding balance.
You should pay particular attention to the interest on this loan and make sure that it
doesn’t outweigh the weighted average of interest of all your other loans.
Ideally, the loan you take out will have the lowest interest rate possible.
You could even ask your bank to buy your debts off of you, instead of loaning you the money
to pay them off yourself.
Step 7: Pay all of your debts off using your new loan
With the money that the bank has leant you, pay off all of your lenders immediately.
This will leave you with one, larger debt; the one that the bank loaned you.
Although you will still have the same outstanding balance, you’ll only have to worry about
paying off one lender.
As well as this, you’ve swapped a handful of random debts for one single, cheaper debt,
that is, with lower interest rates.
This is a very important step in the process because it lies at the very core of this strategy.
Here’s the logic: it is better to exchange numerous debts with various creditors and
different interest rates for a debt with a single lender and one average interest rate.
Once you’ve understood this logic, you’ll be ready to move onto step eight.
Step 8: Negotiate the payment of the unified debt
The penultimate step of this strategy is to negotiate again.
Now that you have a unified debt with the bank, you can negotiate smaller installments
that fit the target percentage of your household budget better.
If you receive a fixed salary every month, you can even get in touch with your bank and
ask them to set up a standing order for a certain amount to be charged towards your
debt repayment on the day that your salary gets paid.
This might all seem like a lot of work, but compared to paying different interest rates
on different loans indefinitely, it’s a walk in the park.
This way you can stop worrying, have a bit of freedom and stop wasting your time with
multiple different lenders.
Unifying your debts isn’t always worth the hassle
In some situations, unifying your debts isn’t worth the hassle.
For example, unifying your debts might not be useful if you only owe debt to one lender
and their interest rates are lower than the ones that the bank is offering.
Or if the interest rates offered by the bank are higher than the weighted average of all
of the interest rates for your current debts.
In this case, you could just unify the debts that are the most expensive to pay off, and
borrow money to pay those off with lower interest rates.
Meanwhile, you could keep the separate debts with low interest rates as they are.
There is yet another exception to this step, which is when no bank agrees to lend you money
at a lower interest rate than you have with your current creditors.
In any case, you should try to negotiate with your lenders and your bank to try and lower
the interest rates.
If you can’t unify your debts, you should focus on paying the most expensive debts off
first.
When the most expensive debt is paid off, move on to the next debt and so on until they’re
all paid off.
Make sure that you’re paying off the most expensive debts, not the ones that you’ve
had longest.
For example, financing a car can last for years, but it can have a lower interest rate
than a credit card.
Don’t compromise your financial plan by paying off the car’s longer debt while letting
the more expensive credit card debt snowball.
If you don’t know how to do these calculations, ask someone who does.
Look for people you can really trust.
Avoid asking for help from people who might have a conflict of interest, such as loan
sharks, lending companies or bank managers who have bank products to sell.
Ideally, you could hire an independent accountant or a debt consultant.
You could even ask a friend that understands more about saving than you do, and that could
help you to get out of debt.
Step 9: During this whole process, make an effort to earn more and spend less
The last step, in all honesty, is one that you should try to carry out throughout the
whole process.
Because interest rates are always working against you, the quicker you pay off your
debts, the better.
This means that the more money you make, the faster it will be to pay off your debts.
If you need to, you could sell some things that you don’t use anymore.
You can sell almost anything on the internet nowadays, from used clothes and electronic
equipment to antique furniture.
Another way to make some extra money is to get another job, maybe as a freelancer.
This way, you could also work outside of your current work schedule.
Be creative and try to think of new ways to make money, as long as you don’t end up
taking on more debts, specially credit card debts.
How to pay off credit card debts
Credit card interest rates are among the highest on the market.
Apart from being a short-term solution, credit cards are a huge threat to people that don’t
know how to control their finances.
The tip with credit cards is to use them to avoid making large purchases in installments,
instead using them to pay off the amount monthly.
If you want to use a credit card to get benefits such as free miles or points, you could look
to set up any payments that come off your credit card to be replaced by your current
account in the form of a direct debit.
In any case, you should always avoid paying a small initial price, followed by installments.
Is there such a thing as good debt?
You might have heard the rumour that there is good debt and bad debt.
Good debt is often referred to as the kind that you use to pay for long-term expenses,
such as buying a house or a car, or even opening up a business.
You should be careful when calling it a good debt, though.
Although some of these loans might have low interest rates, it’s important that you
remember to live by the rule of spending less than you earn.
Don’t sacrifice your financial freedom just to show off your social status by buying a
luxury car.
Save the money first, and buy the goods later.
As well as helping you to avoid the issue of paying interest, it’ll also help you
to ensure that you truly want and need the thing you’re buying, or whether you’re
just buying it on impulse.
Don’t let yourself fall victim to advertisements and payment plans.
The 9 steps to getting out of debt
Let’s quickly review the 9 steps to getting out of debt.
Firstly, make a temporary adjustment to your budget and allocate the highest amount possible
to paying off your debts.
Secondly, list your debts in a spreadsheet, making sure to note how much you owe, who
you owe it to, why you owe it, and most importantly, how much interest there is on each of the
debts that you owe.
Thirdly, order your debts, from most expensive to cheapest.
By this I mean, from the debts with highest interest rates to lowest.
The fourth step is to negotiate with each lender and see if you can agree on a discount
for your interest rates.
The fifth step is to update your spreadsheet with the new owed balance and calculate a
weighted average of all the interest rates on your debts.
The sixth step is to ask your bank for a loan that will cover the full amount of your debts.
This new loan should have a lower interest rate than the weighted average of the interest
rates on all of your current loans.
The seventh step is to use the money from the new loan to pay off all of your individual
debts, leaving you with a cheaper unified debt.
The eighth step is to negotiate installments to pay off the one large debt, and set up
a direct debit so that you pay off another piece of your debt every time you get paid.
The ninth and final step is one that you should really be doing throughout the entire process.
This step is to put into practice strategies that will help you to earn more and spend
less, while still paying off your debts.
The nine steps that I have told you about in this conversation is a virtually foolproof
strategy for solving your problems with debt.
Your challenge now is to not take on new debts.
In order to achieve this, you must change your relationship with money and adopt a mindset
of financial abundance.
I left the nine steps written down so you can consult more easily and you can visit
https://arata.se/getoutofdebt to enjoy