The beginning of the year is the time for great optimism as you set goals you want to achieve. However, what happens when you have debt that you have carried from the holiday period?
You can be all ‘doom and gloom’ about your debt, or you can change your perspective and think, I have an entire year to pay this debt. You can pay your debt and accomplish other things within the same year.
Nonetheless, here is a step-by-step guide to tackling your post-holiday debt.
The best way to understand how much debt you have is by assessing your expenses over the holiday and singling out how much you financed with your future money.
During the holidays, we find ourselves in situations that we are not prepared for; hence, we spend more than we have.
After the holidays, you come back to reality and realize that you have a debt to service,
The first step in such a situation is to calculate your debt. Look into your financial statements and check the overdraft loans you are carrying. Add up all the mobile loans you accumulated. Check other loans you have.
A clear picture of how much you owe will enable you to create a practical plan to repay your debt.
Ensure you also add the debt you had before the holidays. It will be much better to approach your debt repayment on one strategy instead of having a separate strategy for every loan. That will be cumbersome and might cost you time and money in the long run.
Once you have a full report of how much you owe, you can create a repayment plan.
The first step of your repayment involves understanding how much you make and your expenses. This way, you know how much of your paycheck is left to be used to service the loan.
Assess whether the money you have left will be enough to cover the minimal installments you are required to pay regularly. If the money left is insufficient, you might need to cut off some expenses.
You can now create a repayment plan depending on how much you have left to service the loans.
Here are three approaches you can employ in your debt repayment plan.
In the snowball method, you prioritize the smallest debts first and gain psychological momentum to tackle the bigger ones.
If you were to take on the entire loan, you might need to cut your expenditure significantly. Cutting back significantly is not easy. Ease yourself into it by starting slow and racking up as you go.
Starting slow will help you because you will knock out the small debts off your debt catalog even by paying smaller installments.
Once you register that you are making progress and checking off some loans, you get psychological momentum and motivation to cut back even more. You also get the motivation to pay off the big loans. By the time you realize, your progress has snowballed, and you have finished paying your loans.
Just a tip. Since the expenditure cutback has also snowballed, you will realise that you are living on less than you started. After finishing the loan, you can keep your expenditure at the same level and redirect the surplus towards savings.
The avalanche method is for the frugal ones who worry about the compounding effect of interest rates. To implement the avalanche method, start by tackling high-interest debts first and minimizing overall interest payments.
Select the one with the highest interest out of your loans and start by paying it off. The more you hold a loan with high interest, the more it will cost you. Hence, paying it off first will reduce how much it will cost you.
The loans with the smallest interest will cost you less. Hence, you can hold those for a little longer.
However, when implementing the avalanche method, you must check that you do not default on any loan. Make sure you pay the minimum payment for each loan and dedicate all the surplus to the high-interest loan.
Once you clear the highest interest loan, take on the second highest, and keep trickling down like an avalanche.
Another way to approach paying back your holiday debt is by consolidating it. Consolidating makes your debt management easy as you only have to pay one debt.
To consolidate your loan, you need to add up all the loans you owe and then take a loan that covers all the small loans you owe. Once you get the loan, you pay back all the loans, leaving you with one big loan to service.
Consolidating your loans helps you eliminate the confusion of paying different interest rates on different debt products and the timelines that come with different products.
Now, you only have one loan to pay and one set of guidelines to follow.
Nevertheless, you have to watch out to avoid taking a high-interest consolidation loan that will cost you much more than it would have to pay off the smaller loans individually.
In addition, the bigger loan will have a more extended repayment period. After servicing the loan for a while, you can look into renegotiating your repayment period and extend it to reduce the amount you pay every month. Reducing the amount you pay every month frees some money for you to use in your day-to-day or redirect into savings.
You will need to have realistic goals to accomplish your pursuit of paying back your debt.
Goals help you set a timeline for when you want to be done with your debt. Consider different timelines and your approach, and see how realistic they are.
You evaluate whether a goal is realistic by checking how much you earn, how much you spend, and how much you need to repay the loan.
You cannot overcommit to paying back the loan as that will constrain your life, which is not sustainable.
Stretch yourself, but do not overstretch yourself to achieve a debt repayment goal. You will fatigue faster and drop out of the repayment journey midway, which might lead to loan default.
Supplementing your income is a fantastic initiative to help you pay back your holiday debt. You might not have to significantly cut back on your expenditure with more income. You might have to have less time to yourself, though.
To supplement your income, you can take on part-time work, you can take on an extra shift at work, or indulge in freelancing.
Any venture such as this one of repaying your debt will require discipline.
You will need discipline to keep paying the amounts you committed to. Set reminders not to miss a payment and track your progress regularly.
You will also need to be disciplined to stick with the sacrifices you have chosen to make to pay back the debt.
Disciplining yourself not to spend impulsively will be essential in paying back your debts.
In addition, you will need to cultivate discipline to avoid overreliance on credit and the discipline needed to create a financial safety net through savings and investments.
Coming back from the holidays and realizing how much debt you have accumulated can be demotivating. However, it is not the end. With a plan, you can take on the debt and clear it. Assess how much debt you have, create a plan, set realistic goals, find supplementing income, stay disciplined, and you will be debt-free.