If you’ve come into 2018 bringing with you debt from last year, one of your new year resolutions could be to pay off the debt by the end of this year. But you know as what many say, “fail to plan and plan to fail”. The same goes to paying off your debt – have a solid plan that you follow religiously and Viola! You’d find that you’d cleared the debt easily.
The problem is most people may not know how to go about planning their finances, giving in to living day-by-day and month-on-month, to find that at the end of the year, the debt they have just increased even if they have been making the minimum payments. If you belong to this class of debtors, it’s time to buck up your game and use these 5 tips to help you reduce debt effectively.
1. Fix an amount to pay each month
The way to clear your debt fast is to make it a priority. Instead of waiting till the end of the month to use what’s left in your savings account to pay down your debt, do it the first thing your salary comes in. This will help instil discipline so that you do not squander away what you have before you are able to pay down your debt.
If you keep feeling that you don’t have enough to make ends meet, sit down to think about your monthly budget properly. First, keep track of your expenses for 2 to 3 months to find out how much you are spending per month on fixed and variable expenses. You can then work out a budget.
Say you are earning $2,500 per month and have fixed expenses of $1,800 per month, you may want to set aside about $500 every month towards debt settlement.
2. Stop using any form of credit
Having a credit card in your wallet may give you a false sense of security – in case the money in your deposit account runs out, you can always swipe your card until your next salary comes in. But that sense of relief you feel when you swipe your card is short-lived. You know that when you receive your next credit card bill, the amount is just going to add on to the mountain of debt you are trying to reduce. If debt is a huge problem for you, perhaps it’s time to stop using any form of credit or loan for the moment until your debts are settled.
3. Consolidate your debt
Perhaps you’ve taken on multiple lines of credit and you are finding it hard to track how much money you owe. In such cases, it may make sense to consolidate your debt with a single loan. Yes, it may sound counter-productive to take another loan but let’s look at a scenario below:
Andy has got 3 outstanding debts:
- Credit card A with $3,000 at 25% interest p.a
- Credit card B with $2,000 at 25% interest p.a
- Personal loan with $5,000 at 10% p.a
At this rate, his interest payments alone will come up to $750+$$500+$50 = $1,300, without taking into consideration the effects of compounding. If he is however, able to get a consolidation loan, it could help reduce the total amount of interest he has to pay:
Andy takes on a consolidation loan for the 3 debts at 12% p.a. The interest that he has to pay now becomes – $10,000 x11% = $1,100.
With the consolidation loan, he would be able to save $200 from his interest payments.
4. Find a side income
If you find that there’s little way for you to put aside more money to pay down your debt, consider a side hustle. In this day and age, it is not difficult to find a part-time job to supplement your income, if you have the time. If for some reason you need to stay at home, find a side job where you can work online. If your full-time job involves shift work, you might consider driving as a Uber/Grab driver to help supplement some income. Remember, this will only be a short-term solution so that you can clear your debt.
If you have a hobby that you can monetise, consider it as well! There are many out there who have turned their passion for baking or crafting into a side business. The great thing is you don’t even need to set up a physical store or use much start-up capital. Rely on word-of-mouth to help you spread the word!
If you have a spare room in your house, you may consider renting it out to get some rental income as well.
5. Sell what you don’t need
You may have several items or appliances sitting around in your home that you no longer need. Perhaps that rice-cooker that you got as a house-warming gift? Or those clothes that you no longer wear and have accumulated over the years? Try using platforms such as Carousell to list your unwanted items, or simply hold a garage sale at home if you have lots of stuff to sell. You might be surprised by the amount of money you get from your unwanted items!