Last Updated on December 5, 2023 by BFSLTeam BFSLTeam
The word “debt” is not a pleasing one to anyone’s ears. The last thing you want is debt piling up to a large amount and not being able to pay it. Although you may have faced debt before, and the thought of debt scares you, there are numerous ways to avoid it by following a few simple steps and strategies. If you are currently in a situation of debt, you may be confused about where to begin your journey of debt resolution. How do you commence this journey? There is no need to worry as you begin with the steps to settling your debt or avoiding it altogether. You need to gather all the information about your debt situation as a first step and then move ahead.
Table of Content
- 1 Step #1 – Gather Knowledge About Your Debt
- 2 Step #2 – Establish Your Budget
- 3 Step #3 – Use the Snowball Technique of Payment
- 4 Step #4 – Clear Your Payments
- 5 Step #5 – Clear Debt with High Interest First
- 6 Step #6 Have a Fund for Emergencies
- 7 Step #7 – A Budget and a Tracking System
- 8 Learning from Mistakes
Step #1 – Gather Knowledge About Your Debt
Each individual is unique and one debtor is not the same as another. You need to have complete knowledge about your own debt, related to how much you have to settle and the dates of settlement, apart from who you have to settle your debt with. An important aspect of settling debt is the interest charged and you should know that debt settlement includes this amount too. With the funds you have at your disposal, you should be able to move ahead with how to settle your debt by careful capital allocation once you know all about your debt.
Step #2 – Establish Your Budget
The creation of a budget in any financial situation is the key to managing your finances effectively. The creation of a budget, based on your distinctive financial situation,
Is crucial for you to allocate your capital in an appropriate manner. If you have a debt to pay, you must avoid unnecessary spending or overspending.
Step #3 – Use the Snowball Technique of Payment
Applying the Snowball Technique of payment is easy. Think of a snowball plummeting down a mountain. As it rolls down and picks up speed, it tends to get larger. Loans should be treated in the same manner. Debt from loans gets larger if you don’t start settling early. Therefore, you should settle smaller debts first and then settle any large payments. Similarly, when you take loans, it’s a good idea to settle them off as soon as possible so they don’t gather steam and collect to large amounts later.
Step #4 – Clear Your Payments
Related to the previous step, when you make purchases, it is a good idea to clear your payments on the spot if you can. Using the facility of credit may be great for large expenses, but we tend to use it for day-to-day small expenses too. Whatever the case may be, loans must never be left pending settlement and should be paid off fast. New debt has a sly way of getting attached to old debt and sums may accumulate faster than you can blink.
Step #5 – Clear Debt with High Interest First
If you have to pay off loans that are tied to high interest rates, those must be settled before ones with a lower level of interest. As interest builds up with your principal debt amount, it is wise to pay off those with high interest as you save money in the longer term.
Step #6 Have a Fund for Emergencies
If you do not already have one, it is a good financial tactic to start a fund for any emergencies. This helps you in the event of any unforeseen circumstances and acts as a safeguard against unpredictable life situations like a medical emergency, for instance. If you have such a fund, you won’t have to incur more loans, and consequently, more debt.
Step #7 – A Budget and a Tracking System
Having a budget is a vital step towards maintaining your financial health. However, sticking to it is equally crucial. Moreover, you should regularly monitor it to find out where you are spending, and how much you are spending. This helps you to prioritise your capital and manage your wealth soundly.
Learning from Mistakes
You may well find yourself in debt, but you can always learn from your errors and make amends. It is easy to remain free from debt if you are sensible about how and where you spend your capital. One of the most important steps to achieving financial freedom is to be free from any form of debt.
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This content is for educational purposes only.
