Dig Your Way Out of Debt The Smart Way
Let me take you back in time, to the summer of 1990. I was living in South London, twenty-years-old, and was getting married in three months. I had just lost my job and had accrued substantial credit card debt.
In a polite English way, you might say it was a… memorable... point in my life.
In reality, it felt like the sky was falling. I had lost control of my finances, and it felt like I’d lost control of my world. We all have those moments of pure dread, wondering how we’re going to make it through certain situations in our lives, and this was undoubtedly one of mine.
After an initial day or so of burying my head in the proverbial sand, trying to ignore the problem and hoping it would all go away, surprise surprise - it didn’t. I had to deal with it.
Sometimes you need to step out of your situation and look in from a neutral position and take control. Here’s how to do that, so that you can dig your way out of debt the smart way.
The right way to pay off your debts
Here is my three step process to paying off debt the smart way. These are the steps I eventually followed, and the ones I recommend to my clients struggling with debt.
1. Know what you’re dealing with. Gather all the relevant information and lay it out in a clear way. Make a list of all your debts and their monthly repayments, together with interest charged on each debt.
2. Tackle the debt with the highest interest first. Interest charges make up a large part of your minimum payments, especially for credit cards. So, look at your list and work out which company is charging the most interest. Work on paying that debt first, while continuing to pay minimum payments on your other debts.
3. Use the snowball effect on other loans. Once you’ve paid off the debt with the highest interest, apply your monthly payment to the debt with the next highest interest rate. It will take some time to get the ‘snowball’ rolling, but once it’s going, it will get bigger and bigger, with a greater impact on paying off your debts faster.
What NOT to do
In the months leading up to my big wedding day, some big decisions had to be made. We canceled the Rolls Royce car that was going to drive the happy couple from the church, and I instead booked a regular sedan.
This was a smart choice - but not all of the options available to me were so smart.
I was offered the equivalent of a ‘payday loan’ several times. These loans come with the immediate relief of paying off all your debt and consolidating it into one small payment. But the downside to payday loans is hidden in the small print.
Many of these loans charge several hundred percent in interest every year. The largest interest rate I’ve seen was 700% per annum! This basically translates to paying off your debt many times over the original amount borrowed for many, many years.
Needless to say, I did not take out a payday loan - and I wouldn’t recommend you take one either.
Instead, if you have good credit and a job (or some other steady income that guarantees you’ll be able to make payments), you could apply for consolidation or a personal loan. These loans generally offer lower interest rates and bring all your debt into one account.
The end of my own debt story
Because I didn’t have a job, consolidation or personal loans weren’t an option for me. Instead, I was extremely fortunate to be able to borrow from my family for a short time.
Three months later, in September 1990, I was married. A week later, I was hired to work. It took me another year to pay back my family, and it was a year I’ll never forget. This tipping point of actually taking control of my finances was a huge lesson to me; one I have continued to master for both myself and now my clients.
Our lives are ever-changing, and so are the financial needs of our families. Budgeting and performing consistent reviews of your spending habits can stop you from losing control of your finances and avoid these feelings of dread. No matter how old you are, the time to take control of your financial future is now.