Debt is a sum of money that is owed or due. For example, a person or party borrows money from a bank or another party, which creates debt, as the borrower now owes the lending party.
The balance owed will generally be paid back over time in increments. However, most of the time, the borrower will incur interest or a fee over the time they pay off the debt. Failure to pay a debt in full within a specific timeframe may result in further fees and increased interest rates on the debt.
Furthermore, debt collectors may harass you, and in worst cases, unpaid debt can damage a business or personal reputation. You may be deemed unfit for hire, housing, and other vital aspects that can impede your day-to-day life.
Debt Relief - Getting Started
Learn how and where financial freedom begins with the Profit First Cash Management method - Guiding Australian businesses to debt-free success with a simple yet creative money management methodology.
“What debt should you pay off first?”
“How do I pay off debt as a low-income earner?”
“What is debt management?”
“How do I start a budget to get out of debt?”
Finding the answers to these questions requires a quick self-evaluation regarding the following:
● What is your weekly income?
● How many hours do you work in a week?
● What are the debts you owe?
● Do I have an emergency or backup fund?
Answering these questions paints a basic but clear picture of your financial situation. Assessing where you sit financially will help you narrow in on actionable steps you can take towards paying off debt faster.
Let’s jump into our top five tips to answer your questions and get you on the road to debt-free!
Tip #1: Budgeting
There are many ways to budget to get out of debt. But, most importantly, you need to pick a budgeting plan that fits your lifestyle and business. The basic rule is to cut out spending or limit it as much as possible without overdoing it initially – it’s not a sustainable technique!
Let’s compare two budgeting examples.
● Cancelling gym memberships and streaming services.
● Stop taking weekly guitar lessons.
● No takeaways or eating out.
● Selling unused household or personal items.
● Spending only on essentials.
● Cutting back the takeaway coffees.
● Reevaluating memberships.
● Dining out on occasion.
● Don’t buy into trends - Only replace items when necessary.
You can see apparent differences between the two budgeting examples. Extreme budgeting, though effective, can be restrictive and difficult to stick to long-term. Balanced budgeting, on the other hand, is still restrictive but allows you to enjoy habits and indulge in a controlled way.
Budgeting can be easy with a good plan. If you are cutting down where possible and earning more than you spend while efficiently putting your savings aside to pay off debt, you’re on the right track.
Tip #2: Pick Up a Side Hustle
A second job or “side hustle” could be a fantastic way to gain extra income. Any extra income you can earn is inching you closer to paying off debts faster.
If your job requires long hours and you don’t have time for an extra income stream, ask your current employer for a raise. The worst possible scenario is your employer not budging on the pay grade, so why not give it a try?
Tip #3: Debt Management Strategies
In conjunction with applying our Profit First strategy, there is a variety of helpful debt management systems paving the road to debt-free success including:
The Snowball Method: The "snowball method," simply put, is the method of paying off your smallest debt quickly and using the money you were once paying towards that to pay for your next smallest debt.
Ideally, this process continues over time and will end once all debts are paid. The benefit of this is that it can make the process significantly faster, due to the smaller debt payments transferring to the larger debts and continuing to produce larger payments.
Decide what debt to pay off first and ensure you are focusing on paying only this one debt at a time. Tackling multiple debts simultaneously can be tricky and overwhelming, resulting in disorganised action which can lead to late payments and incur even further debt.
Debt Consolidation: This refers to taking out a new loan to pay off other liabilities and debts. It’s essentially multiple debts combined into a single, more considerable debt. There are benefits to using debt consolidation including streamlined finances and the potential for accelerated payoff, but beware this option is not for everyone.
Paying More Than Minimum: Increasing repayments can be a simple but effective strategy. Paying more can help improve your credit score by reducing your credit utilisation. In addition, it is a simple tactic that will help you pay more of your debt faster over time, helping you avoid compounding interest and lowering the possibility of missed and inadequate payments.
Tip #4: Avoiding Extra Debt or Expenses
Although seemingly obvious, preventing extra debt is also essential. Always avoid additional costs where possible, primarily by consistently paying bills on time. The last thing you need is a late fee or other charges building additional unnecessary debt. So, stay organised and keep a sensible eye on your financial state.
The Profit First Instant Assessment steers small businesses in the right direction highlighting where further cash could be saved and what’s being unnecessarily purchased on a recurring basis.
Tip #5: Emergency Funds
An emergency fund can serve as a safety net for unexpected costs or expenses.
There are many benefits to building your emergency fund, including comfort in knowing you have a backup and building confidence and security surrounding your money management skills. Urgent costs or expenses will also be covered should unforeseen events occur such as accidental injury, or unexpected insurance and medical bills.
You can build both at the same time when your funds are balanced, and you are comfortable in your ability to pay towards both when payments are due, but when circumstances change, you must know how to prioritise your funds.
Emergency Fund Should Have Priority If:
- An emergency fund is non-existent.
- Your debt is not financially demanding and can be managed easily.
- You are wary of gaining any extra debt on top of your current debt.
Debt Should Have Priority If:
- Payments are urgent and must be dealt with immediately to avoid additional fees.
- Your debt is financially demanding, and you are currently struggling to keep up with payments.
- You want to prioritise improving your credit score.
Common Mistakes When Paying Off Debt
You’re Not Celebrating Your Wins
Track your progress so you can see how far you’ve come since implementing new debt management tips. It can seem like a never-ending road, but sticking to it eventually results in a debt-free business and personal life, so celebrate each step you take to get you closer.
You Ignore The Emergency Fund
Don’t underestimate the importance of your emergency fund. Too often, people abandon these funds and suddenly need to pay urgent costs. Your neglected emergency fund can’t help you, leading to more debt and a deeper hole of obligation.
Take care of your emergency fund and build it alongside paying your debt, there will come a day when you need it, and you will be thankful you didn’t ignore this vital safety net.
You Don’t Have a Realistic Plan
Many create plans that aren’t achievable according to their current financial situation and are discouraged when things aren’t going as swimmingly as expected. Don’t set yourself up for failure. Instead, create a structured and attainable plan that will work for you over the long term and allow you to continue operating a profitable business.
Debt-free living is more than accomplishable, but only you can make these tips work by controlling and banishing the debt.
Take these tips and actionable steps and start your journey to getting out of debt faster than ever!
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