Destroy my debt!

Getting rid of my debt

Debt is like walking the path to become a multi-millionaire whilst carrying a giant stone. It's going to slow you down.

Take on debt???

First things first: not all debt is 'bad'. You need short-term debt to build up your credit score and you need a credit score if you ever hope to borrow money cheaply in the future, e.g. for a mortgage. The better your credit score (lookout for more in future posts) the lower the interest payments will be on any future debt. You need to take on short-term debt to lower future outgoings.
IMPORTANT: you need to understand what I mean by "short-term" debt. This should not require paying any interest at all. Ideally you want to get a credit card and USE IT. Try to replace all normal cash payments and debit card payments with your credit card staying within your credit limit. Don't use your credit card on your 'wants', only on what you 'need' and absolutely NEVER spend more than you can afford to pay-off IN FULL each and every month. If you pay off your credit card in full, straight away then you will not have to pay any interest on your credit card debt and you will be building a credit score. Remember: Not all debt is bad debt as long as you can control your spending to ensure you pay off your debt in full each month so that you never pay any interest.

"Not all debt is bad debt"

Other useful debt is a Student Loan. There's nothing wrong with taking on debt as a student so long as you have adequately weighed up the fact that your total income with a degree is greater than your total income had you not acquired a degree plus the student loan (i.e. Gain a Degree IF Total Income with Degree > Total Income without a Degree + Student Loan). If this is not the case then University is not for you.

What to do if you are in debt?

However, if by some means you are in a position where you have a pile of debt and large interest payments each month then don't panic. There are a number of actions that you can take to ease your situation:

• STOP: Don't take on any more debt! Don't pay for debt with more debt. That means no more credit card debt, no more personal loans.
• Frugality and Budgeting: If you're someone who has a lot of debt the likelihood is that you've been spending more than you can afford. It is very difficult to increase your income in the short-term so as an instant measure cut back your spending, be frugal and careful and begin budgeting (see my post on Budgeting). Spend only on what you want, not what you need. Over time you can look to increasing your income e.g. through overtime, working another job, selling on sites like eBay etc. 
• Government Help: Most governments in the Economically Developed World can help those with serious amounts of debt. Search the web or contact your local council/ government/ state office. For those in the UK you can get free debt advice if you follow the link.
• Negotiate: It is in the interest of your creditors for you to be able to pay. Use this to your advantage. Call up your creditors and explain that you cannot afford to pay their monthly interest bills but that you do want to pay off your debts. Hopefully they can lower your interest payments or extend the amount of time for you to come up with the money. Remember they would rather you paid than went bankrupt.
• Replacement: Another way to make your interest payments lower is to replace your existing debt with a personal loan, secured loan (e.g. secured against your house), consolidated loan or a loan that has repayments over a longer period, all with lower interest rate. For more ways to lower your interest payments, have a look at 5 ways to lower your debt payments.
• Principle Payments: Whilst you have debt you should not be saving. There are very few (are there even any?) savings accounts or investments that will offer fairly risk-less return that is lower than the interest payments on a debt. So in terms of giving yourself a boost to your wealth and earnings in the future you should always aim to pay off as much debt as quickly possible. This will reduce the amount of interest paid on your debt in the future saving you huge amounts in relation to just paying the interest payment. 

"Aim to pay off as much debt as possible"

I will illustrate this last point further with an example: let's say you have £1,000 of credit card debt which pays 24% APR. This means that your payments in interest alone are £20 per month. At the end of an extremely successful month where you have budgeted, been frugal and boosted your income you find that you have £1,000 left over. You have the option to put this money into an account that would pay 5% interest per annum. Would it be sensible to put this money aside and start saving? Of course not. Whilst you will increase your future cash flow by over £50 per year (once compounding has been taken into account) through savings, you would do a lot better by paying off your debt in full. By paying off the debt principle in full you have given yourself an extra £240 boost per year to your cash flow, money that you otherwise would have paid in interest. So paying your debt is priority after your NEEDS have been sorted. A further example of why paying down debt is so important can be found on Yakezie.com.
For more ideas follow the link to Reduce your debt.

A quick summary for dealing with debt:

1. Stop taking on more debt
2. Negotiate with creditors and attempt to replace the debt with a lower interest paying loan
3. If it's serious and you can't do this seek government help and free debt advice
4. Be frugal and budget to reduce expenses
5. Attempt to boost your income
6. Pay off your debt as quickly as possible

Personally I would try to avoid debt as much as possible. I even have a problem with mortgages, something I will cover in the near future.

What are your opinions on debt? Do you disagree with me? Are there better ways to deal with debt?

So the goal is to put that stone down and get on with your journey at a quicker pace. Go on, put it down.

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