Managing Debt – What do I do
Do a quick search over the internet about the miseries of people who are indebted and you will realise just how great the problem of indebtedness is. The world we live in is geared on debt. Global debt in 2020 is close to crossed $250 trillion mark, who does the world owe this debt to? No one. Global debt is made up of private and public debt of individual countries. If you break global debt down to its smallest unit then you will find that in the end the global debt is made up of debt that me and you, common people like us take to fund our expenditure.
An ordinary person takes up debt for a number of reasons. Some of the most common reasons for which people take up debts are
- Car lease
- Starting up a business
- Funding a vacation
- Credit card debt
- Payday loans to meet cash requirements
- Personal loans to fund purchases or emergencies
- Medical debt
This is not an exhaustive list but it does show the trend of the reasons for which people take on debt. Generally, the banks and lending institutions have got a very stringent policy before approving loans and mortgage and this means that banks carry out credit and background checks to make sure that the applicant can pay them back.
However many times in life, things go out of our control and we end up in a set of circumstances that we did not plan out. Your credit score may have been good when you took the loan but then perhaps you also took a car lease because you were having a period of high income and the future looked secure to you. You may have spent your savings on a family vacation or perhaps any unforeseen emergency may have depleted your reserves.
If we look at the current scenario then we can see that the prolonged lockdowns and quarantines due to Covid-19 infections are quickly depleting the reserves many people had built up over the years. Such a situation can strike any time and before we can even realise what is happening we may end up indebted up to our neck.
Indebtedness is like a double-edged sword it not only puts a financial strain on you but it also destroys your mental health. People who are indebted have a mental clock ticking inside their heads that keeps telling them that they are in hot water.
So if you are indebted, please know that it is very possible to turn the tables and be free of debt but it is going to require your own will power. Yes, the support of friends and family members helps but in the end it is down to you. How willing are you to change your own condition, if you are game for it then no problem in the world is big enough. Let us now look at some of the steps you can also take to come out of your debt problem.
1. List down your Debts
You may not even feel the need to do this but it is always better to start off with a very simple first step. List down all of your debts, how much you need to pay and what are the deadlines. Make a nice table listing all the debts and their repayment dates so that you can have a snapshot of how much you need to pay or the mountain that you need to climb. Stick this paper somewhere you can see it every day.
2. See your Income
Next up, write down your income. Again this may seem unnecessary but it is important to get yourself going. List down your monthly income and then see the amount of monthly instalments that you need to make. This will give you a good idea about how much you will be left with at the end of each month.
3. Contact your Creditors and ask for a Deferral
Under normal circumstances, this would not have been possible but since the Covid-19 pandemic broke out many countries have asked their banks and utility companies to allow a deferral service for their customers/borrowers. You may be able to get your loan deferred to a longer time period and this may give you some breathing space.
Many countries have also deferred utility bill payments and mortgage payments. So do not forget to check out if you are eligible for a deferral.
4. Prioritise your Debt Repayment
Once you know which of your debts have been deferred, you will not need to prioritise your debt payments. Divide your debt into secured and unsecured debt. Secured debt is secured against collateral such as your house or car whereas unsecured debt isn’t backed by collateral but nonpayment will seriously affect your credit score.
Your priority should be to pay off secured debt first because you stand to lose the most if you default on the payment of secured debt. Next up you should pay off high-value debt such as your credit card debt because the longer it remains unpaid the more interest it will accumulate.
Some people may prefer to pay credit card debt before secured debt such as mortgage but in my opinion, it is better to protect your assets instead of your credit score at this point. If you fail to pay your mortgage and your house goes into foreclosure then that’ll be another set of problems that you do not want to deal with right now.
5. Reduce your Expenses
It goes without saying that if you are indebted then you will need to free up as much financial space as possible and this requires cutting down on expenses. List down your monthly expenses and cut down everything you do not need. This doesn`t have to be forever, you are only going to go on austerity mode as long as you are indebted. This is what matters right now. Your nights out and indulgences can wait till you have gone debt free.
6. Don’t forget to Save
Saving is as important under debt as it is important when you are free of debt. You won`t be able to save much but whatever little you can save will do. Open up a savings account or invest your savings and returns into some profitable investment option so that while you are trying to get rid of debt, your savings keep on building up.
Try to follow these steps and if you manage to get your strategy right then you can and will get yourself out of debt. Remember, it is possible to get out of debt. It only requires your will power, positivity and fighting attitude. It may take some time but once you are debt-free, the air of freedom that you will breathe will be worth it in the end.