Debt is a double-edged sword. You can borrow money and invest, or even pay your high-interest loans. But when you don’t pay your debts, it can take away your financial freedom.
Worst of all, you can get into the dreaded debt cycle. When you’re in a debt cycle you fall behind your financial obligations, and fall further into debt. This forces you to live from paycheck to paycheck because you have little or no savings.
Getting out of debt can feel like an unachievable pipe dream. Thankfully, there is a way out! Here are some simple ways to step out of debt for good.
Read Also: Why Debt is Good For You
Debt-to-income (DTI) ratio refers to the percentage of your gross monthly debt repayments. In simple terms, it's all your monthly debt payment divided by your gross monthly income.
Knowing your DTI is important because it reflects your financial health. Besides, lenders use it to measure how much you can borrow.
To find out your DTI, you need to calculate it.
Calculations make most people develop cold feet. Don’t fret though. This will be a simple arithmetic operation involving only 3 steps.
Step 1: Add up your monthly gross income.
Step 2: Add up your monthly debts
Step 3: Divide your monthly debts by your monthly gross income.
Here’s an example;
Gross monthly income: Ksh90,000
Primary job: Ksh70,000
Side hustle: Ksh20,000:
Gross monthly debt: Ksh30,000
Sacco loan: Ksh20,000
Helb loan: Ksh10,000
Debt to Income calculation
30,000/90000 = 0.33
Multiply the result by 100 to get the percentage.
0.33 x 100 = 33%
Always keep your debt-to-income ratio as low as possible. Generally, below 35%. You can lower it either by increasing your sources of income or lowering your debt.
Budgeting can help you crawl out of that debt hole, especially if your debt is due to overspending. When you create a budget, you can identify items you’re wasting money on and cut them from your spending.
So, review your daily expenditure to find what to cut out. For example, you may need to move to a cheaper house or stop ordering in or eating out.
As you review your spending, look out for
After cutting down your expenditures, use the saved money to repay your debts. You’ll be surprised by how fast you’ll clear your debts.
Now that you're living within a budget, it’s time to create a debt repayment plan. A good plan will keep you on track and prevent you from falling further into debt.
Two of the most popular debt repayment methods are the debt avalanche and debt snowball methods. Both of these methods suggest tackling one debt at a time
With the avalanche approach, you pay the minimum payment on all debts and then use any extra funds to pay off debt with the highest interest.
On the other hand, the debt snowball method suggests making minimum payments on all debts and then focusing on paying the small loans first. After paying the smallest debt, you take what you were paying and roll into the second debt.
If you’re wondering how to set up your debt repayment plan, follow these easy steps.
Living a frugal lifestyle will help you get a grip on your finances. This is because you’ll spend less and save more for your future.
If you’re looking to adopt a frugal lifestyle, here are a few frugal living ideas:
However, a frugal or minimalistic lifestyle doesn’t mean giving up on everything. Give yourself a good treat once in a while.
To live a frugal lifestyle seamlessly, keep in mind the following rules.
More learning: 13 Tips to Live Cheaply But Don’t Look Cheap
When repaying your debts, make sure you’re paying more than the minimum monthly payments. If you’re only making the minimum payment, it can take forever to clear the debt. This is because most of what you pay will go towards paying the interest rather than reducing what you owe.
Let’s say you have a Ksh100,000 bank loan and a Ksh10,000 minimum monthly payment. If you only make the minimum payment, it will take you 10 months to repay the balance. But if you paid at least Ksh15,000 per month, you could repay the loan in 7 months.
Even an extra Ksh1000 or Ksh2000 can make a difference. But more is better since you’ll clear your debts faster.
Earning extra income allows you to bump up your monthly payments. The more income you earn the easier it will be to repay your debts.
You can increase your sources of income by;
Any extra income you generate will push you closer to debt freedom.
Windfalls can help you get debt-free. A windfall is an income that is sudden and unexpected. Examples include work bonuses, lottery wins, inheritance and cash gifts.
You could commit the entire windfall or split it between repaying your debts and other expenditures.
When you use windfalls to pay off debt, you’ll build momentum and clear your debt faster. If you get a pay raise, you can also use it to accelerate your debt repayment.
Read also: 5 Things to Do When You Get a Salary Raise
Stashing emergency funds in a high-yield savings account can help you break the debt cycle. Although it may seem counterintuitive, you won’t have to borrow and get further into debt when an emergency occurs.
Experts suggest keeping 3 to 6 months of your expenses in an emergency fund. Although this might seem like a tall order, start small. As they say ‘Haba na haba hujaza kibaba”
After funding your emergency account and getting out of the debt cycle, consider other financial goals such as saving for retirement.
If your debt still feels overwhelming, you don’t have to deal with it alone. Consider getting professional financial help.
It can be an uphill task to break the chains of debt bondage. However, if you follow the steps we’ve discussed, you can crawl out of debt and improve your overall financial health.
That said, getting out of the debt cycle requires plenty of patience. Stick with whatever approach works for you.