Are you ready to alter to your spending habits to clear your debts?
Today, I will show you how this can be done.
But first let us discover the meaning of the word debt.
Debt is money owed by you to be repaid to an individual, lending or financial institution who lent you the money. A debtor is an individual who owes the money borrowed, and a creditor is an individual or financial institution who lends money to individuals for specific purposes.
There are some people who use debt for personal purposes. For example, individuals seek financing to purchase a car, furniture and so on.
This can be acquired by the following:
- Borrowing money from family or friends.
- Receiving a loan from a financial institution.
- Obtaining a credit card.
I strongly recommend that you seek to repay these personal loans as quickly as possible. You do not wish to incur any more interest on your debt than you should.
Some people use debt for investing purposes. For example, individuals seek financing to purchase real estate for personal and commercial purposes. Established businesses also seek financing to acquire capital to expand their business.
Money is acquired for investing purposes to diversify an individual’s investment portfolio and to expand a company’s operations, while money is acquired for personal purposes to acquire necessities for everyday living.
If you decide to approach a financial institution to borrow money for these specific purposes, they determine first of all, whether you are capable of repaying the money you require. One of the ways they examine an individual’s financial background is by reviewing the activity in their bank accounts; while they examine a company’s financial background by reviewing their financial statements. The money is often granted based on how well you manage your own financial affairs. I am sorry guys; they do not give money to irresponsible individuals or companies.
It is very important to be always responsible when it comes to managing your debts. If you act irresponsibly, there will be consequences, such as:
- Strain in your relationships, if your borrowed money from a family or friend.
- Incurred interest added to the monthly amount allocated to repaying the debt.
- Repossession of your personal items to satisfy the debt owed.
- Identify which debt is charged with the highest rate of interest. The loan document normally states the rate at which you borrowed the money. Upon determining which debt has the highest interest rate, focus on repaying that amount as quickly as you can. I am not advising that you pay off the remaining balance in one fell swoop. I am suggesting, you add ten, twenty or fifty dollars to the monthly amount set to repay your creditor. Guess what! In time you would have repaid that debt. (Please remember to repay any other debts. It is important to service them along with repaying this debt)
- Upon repaying that debt with the highest interest rate, you can then use that amount paid to that debt and apply it to the debt with the second highest interest rate. Upon repaying the debt with the second highest interest rate, you can use that money (amount used to repay debt with first highest interest rate + amount used to repay debt with second highest interest rate) to repay the debt with the third highest interest rate. And this process continues until you are completely debt free!
- For those with credit card debt, do not settle to pay the minimum amount due. Repayment of the minimum amount will not reduce the balance effectively. What normally happens, interest charged to the credit card is deducted from the minimum amount paid to the credit card, and therefore the amount you paid will not be fully applied to your credit card. Let’s be aggressive in repaying our credit card balances.
I say to you that it is possible for you to see your debts gone. It will take time, discipline and self-control. Always make sure you have a plan for allocating and spending your money. Budgeting is a very effective and powerful tool that can be used to manage your debts. You can never accomplish goals unless you have a plan.
Look out for our next blog, “How to Use a Budget to Repay Your Debts”.