Being in debt can be frustrating, and once you owe people money, it can be hard to escape. If you are ready to start paying off debt, you need to learn how.
There are several different ways you can approach debt management, and you must clue yourself in before you try and pay everything off. Otherwise, you may find yourself falling back into arrears.
Paying off debt – quantifying what you owe
Debt refers to anything that you owe to someone else, whether that’s an individual or a business. When we talk about debt management, it’s generally about money.
It’s important to realise that almost anyone can get into debt. The struggle is getting back out of it, as interest accrues on each loan or debt.
The majority of people have some kind of monetary debt, usually in the form of credit cards, mortgages, and car loans in their name. And before you can credibly build you savings, you need to find a way to clear or manage your debt.
How people fall into debt
Changes to income or spending are just a couple of reasons debt may become unmanageable.
Exact figures vary but according to the latest UK Debt Statistics report from Aryza, the average personal debt in the UK increased by 11.93% in 2021. At that time, one in five people were struggling with paying even basic bills, such as utilities and energy.
Inflation is soaring in the UK, the US and around the world, pushing many people even further into debt. With energy prices quadrupling in the UK, NI rising from April 2022 and food prices going up, it’s likely more and more people will fall into debt.
If you feel you’re struggling or have no strategic approach to tackling your debt, you’re not alone. Let’s look at some approaches to sorting your debt.
Different approaches to paying off debt
Approaches to debts payment should focus on more than just lowering spending and increasing earnings.
These alternative approaches delve into debt payments in more detail so that you can come up with a realistic plan to pay off debts as quickly and worry-free as possible.
1. Take a deep breath
There’s no doubt that being in debt can be incredibly stressful. Before you start anything, you should take a moment to calm your emotions. By allowing yourself to feel and take control of your feelings about your debt, you enhance your rational thinking.
2. Don’t be afraid to share
If you have family or friends you can speak to comfortably, talk to them about your debt. Discussions can help you come to terms with the reality of your situation and allow you to talk through different solutions to find the best payment approach.
It can be easier to speak to someone outside of your personal circle about personal debt and financial matters. Head to Citizen’s Advice or another independent and trustworthy source of information and assistance, and talk to an advisor about your debt. There is always a way to get help with money matters, so don’t suffer alone.
3. Seek out information
The more you know, the better equipped you will be. Brush up on your maths before working out debt payment plans.
Check out books and other sources on personal finance. If you failed to pay off debts before, it is likely because you didn’t know enough about personal finance to find a suitable long-term approach.
4. Find your inspiration
Check out debt payment stories from both experts and novices. There are plenty online.
Learning how other people cope with and rid themselves of debt will help you find the motivation you need to start and finish paying off your debt.
5. Work out your DTI
Ideally, your DTI (debt to income ratio) should be less than 35%. You are in a good position to begin making payments if it is. You should be able to make payments, with some changes to your finances, if your ratio is between 36 and 49%.
To work out your DTI and debt payment readiness, divide your monthly expenses by your pre-tax income.
6. Plan long-term
Many people make the mistake of overextending themselves. You won’t sustain your efforts if you do too much at once.
Paying off debt is just one step of the pathway towards healthy and growing finances, so you must get this part right. A well-thought-out approach will ensure that you can continue paying off debts now and do not fall back into debt in the future.
7. Pause before spending
No one likes seeing their money disappearing, and by taking some simple steps you can use this feeling to your advantage. Even people who consider themselves in control of their finances tend to overspend. You can help curb your spending by delaying unnecessary purchases to see if the pain of paying will outweigh your desire.
Automise debt payments to reduce your mental load and avoid feeling the pain of paying. Scheduled payments will leave your account without needing you to choose to make the payment.
Plan your debt repayment for the long term
There is no fixed length of time needed to pay off debts. It may take more or less time depending on how much you have to pay, your income level, and your essential expenses.
You can pay off debt faster if you have a well-balanced plan that isn’t too tough to manage now and in the future.
Being in debt can be incredibly stressful and lead to negative emotions. There is a path through debt repayments, so if you feel overwhelmed take a beat. Work out a plan along with professional assistance and take it step by step. Every journey starts with a single step and the path to being debt-free is no different.