Being in debt is always a particularly stressful experience, no matter the circumstances you’re in. If you’ve signed for a loan, borrowed money in other ways, or are unable to pay your bills on time, you are required to pay back your debts as quickly as possible. Your creditors usually don’t care much for the other obligations you have in your life.
Sometimes debts can be an unintentional consequence of excessive purchasing costs. Sometimes they are linked to unforeseen changes in your life — sudden unemployment, forgotten contracts, or even a new addition to your family can mess up your household budget. Most people don’t stay in debt for lack of trying, but life isn’t always fair, and things can seem impossible if you don’t know where to begin. That’s why it’s important to have a plan!
Here’s something to keep in mind: pulling oneself out of debt requires a lot of discipline over an extended period of time. Such a project isn’t an easy undertaking, and it sure isn’t something that you can just do on the side. Most likely, you’ll need to make some changes to your lifestyle and fight against peer pressure from time to time.
So while you should make your plan as easy as possible for you, you won’t get around making some tough decisions. If you’re used to rewarding yourself with shopping sprees, or if you prefer to spending your nights in bars and clubs, you should get used to the idea of giving up some of these vices. Otherwise, it’s going to be extra hard to free yourself from debt. Additionally, if you and your partner are trying to get out of debt together, you need to be on the same page. It’s next to impossible to achieve your goal when the two of you are running in different directions.
But before we begin, you should take some time think about what your life is going to be like once you’ve successfully freed yourself from debt. Imagine how great you’re going to feel when you have the time and energy to pursue your real goals and dreams, plan a great vacation, or build a financial future for you and your children.
Take this free #ZuperTip: Create a visual reminder of your financial goal and put it wherever you spend your money: your wallet, the computer, or next to your credit cards.
Ready to begin? Let’s do this!
A common problem with debtors is a missing overview. For many, it is easier to get through the day when they do not have to actively deal with their debts. While this is more than understandable, an attitude like this is rather counterproductive. When we want to know how to get somewhere, we should first think about where we want to start.
So, this point is all about realizing how much money you owe to whom. The easiest way to do this is with a piece of paper and a pen, or even in a spreadsheet. Put in all your debts, balances, interest rates, and the minimum required monthly payments, and add the amounts to get to your status quo. If you are shocked by the result, remember that this is the highest this number will be. It’ll already be smaller next month and even smaller the month after that. Step by step.
Now that you know how much you have to pay each month, you can easily start budgeting for it. Moreover, the overview of your interest rates is going to help you pick the right repayment strategy.
Many loans come with very high interest rates. Overdraft fees can be more than 9%, while interest rates for credit cards usually range between 15% and 20%. This makes it particularly useful to consider restructuring your debt. If you see any high-interest rates in your spreadsheet, we recommend you take a look at a credit comparison site to see if you can get a better deal.
Ideally, you can not only lower your interest rates but also pay off several loans at once, in order to keep a single goal in mind. In addition to lower costs, this approach can also help you reduce some of your financial anxiety.
It also makes sense to talk to your bank when you’re trying to pay off a real estate loan. Changes in these types of contracts are often difficult to negotiate, but paying off your debts is also in the interest of your bank. Some banks would, therefore, prefer renegotiating to the costs of enforcement.
Seeking the dialogue with one’s creditor is generally good advice and very important, especially if you are unable to pay the installments in time. To admit to your guilt is not necessarily the nicest experience, but you are not the first person in this situation and will most likely not be the last. Most creditors are willing to talk and are interested in making your situation better — because it’s the only way to make their own situation better. So do not be afraid to ask whether you can suspend your repayment for a month.
In order to pay off your debts, you have to find ways to loosen up your existing income a bit. If you know where your money goes, you can better decide if and where you have a potential for savings.
If you haven’t had time to read the Zuper article on budgets yet, this is the perfect time for it! In the article, we will explain the most important steps you can take to set up a budget, how to optimize your spending, and how you can actively include your monthly debt payments in your household budget without having to compromise.
To sum it up: a good budget is responsible for helping you prioritize your expenses. Look for smaller things that add up to bigger expenditures during the month (hello Starbucks coffee …) and subscriptions you don’t actually use.
Since you now have an idea of how high your monthly payments need to be and where that money is coming from, it might be a good idea to take another look at our spreadsheet from step 1. If you were unable to restructure your debts into one single loan, you should only pay the monthly minimum for installments with the lowest interest rates.
Ideally, this will leave you with enough money to pay off more than just the minimum required payment for the debt with the highest interest. Keep paying off your debts like this until the loan with the highest interest rate is paid off. Once you’ve done this, you should pat yourself on the back, look back at where you started, and be very proud of yourself. You’ve earned it. Well done!
This method of repaying your debts ensures that you will pay the least interest.
Alternatively, you can try the “snowball” method. You start with the smallest loan, pay it off as fast as possible, and use your new-found momentum to step up to the next biggest loan. You won’t save on interest with this method, but you might get a smaller win earlier, which will help you stay motivated.
Whichever method you choose, we recommend setting up standing orders with your bank, to not miss your payments. And a good budget will help you to always have enough money in your account.
You can only pay off your debts if they don’t increase each month. This means you should stick to your budgets and resist temptations.
Depending on your city and your monthly income, this can prove to be rather difficult — especially if you do not actively keep an eye on your expenses. We’ve found that an easily accessible and visual budget is incredibly helpful when you need a quick answer to the question “Can I really afford this?” Our free Zuper app for iOS and Android comes with a useful budgeting feature, which not only automatically categorizes your expenses, but also lets you check your budgets in a simple and beautiful way. You should really try it.
Alternatively, you can try and use cash. The idea is that all important bills are paid directly from your account, and you carry your pocket money with you to spend on restaurants and impulse purchases.
In general, we advise against using “plastic money”. Credit and debit cards have the side effect of loosening the relationship you have with your hard earned money. However, if you can not avoid paying with your cards, it is worth using either the free Zuper app (iOS & Android) or keeping track of your transactions in other ways and then manually updating your budgets.
Obviously, you won’t get around adapting your lifestyle to your new payment schedule. You should try to adapt new habits that support your financial goals. If you feel comfortable, tell your friends and family about your plans. This might help them better understand why you suddenly prefer home-cooked meals and spending your Saturdays with Netflix. In the best case, your friends or family will participate in cheaper or even free entertainment options.
A rather obvious way to help you pay off your debts is to earn more money. I get that this was incredibly easy to write and will be so much harder to pull off, but especially when you can’t seem to optimize your budget even further, every cent helps.
If you have a strong position in your company, now might be a good time to ask for that raise. However, you should be able to justify it with the amazing work you have been doing, not your debts.
If you have the necessary skills, you can also earn some money as a freelancer. Ask your friends, family, or colleagues if they need help with any of their projects.
Finally, here’s another free #ZuperTip: Money gifts and reimbursements should be used as much as possible for the repayment of your debts. If you spend €300 a month on your debts and you suddenly have an extra €1500, you can either spend the money on some impulse purchase OR reach your goal of being free of debt five months earlier.
And please don’t forget to celebrate yourself whenever you reach a new milestone. You have spent a lot of energy and discipline to get to this point. You can be proud of yourself!
Team Zuper wishes you all the best on your way out of debt!