Thursday, September 16, 2010

Debt: from a roadblock to a stepping stone

In recent years, it has been apparent more than ever that the majority of people are ill-equipped in balancing their personal finance with living a stress-free life. At least it was apparent to me, through my coaching of my clients. It didn't really matter which; whether I was coaching them on a specific life goal in their careers or personal lives, of all the factors causing stress in a person's life, money issues always ranked at the top of the list.

Personal finances, particularly debt seemed to be the dominating factor that was negatively impacting their personal growth, and in many cases, what was holding them back and keeping them from achieving their goals, and keeping them from living the life they desired.

The nature of the debts or their amounts didn't matter much either. Any debt, of any amount, no matter how insignificant caused an enormous amount of distress. The real issue, I believe, lies with the fact that most of us lack the knowledge, understanding and skills in handling our personal finances.

It's quite easy to build up debt, and it's easier still to get out of debt if you have the know-how. You can be debt free sooner than you think. It just requires your honest commitment, a little planning and the desire to live Free-of-Debt for the rest of your life. Yes, you can easily do it on your own, without the help of an expert.

I do not contest that hiring a Personal Financial Planner or any other financial expert is a great idea. In fact, a savvy Personal Financial Planner won't just help you to get out of debt, he/she can even help you start building a small fortune through wise planning and investment. Personally, I highly recommend that you do hire a professional, just the same, this information am going to share with you today, can greatly save you a lot of time, money and agony. You can be on your way to becoming debt free as soon as you start implementing one of these strategies.

There are several good strategies which you can put to good use to pay off all of your debts gradually, with ease and at a pace you are most comfortable with. I will be discussing these further on, but first you got to know that regardless of which strategy you choose, there are some steps that you need to carry out prior to that:

Step one: Who are your Creditors?

Know exactly whom you owe and for what. Do you have a home or car loan? Do you owe a bank or another creditor? Do you owe a friend or relative? Do you owe your employer in salary advances?

Step Two: How much do you owe?

Know exactly how much you owe. How much do you have left on your car or home loan payments? What about your personal loans? Add them up. Creating a table with everything you owe can help put things into perspective.

Step Three: Use Debit not Credit.

Stop borrowing money NOW > don't spend more than you have. It may sound elementary, but it's surprising how many people just ignore that rule.

Stop using credit cards, replace your credit cards with a single debit card.

Step Four: Consolidate your debts.

Consolidate and renegotiate as many of your debts as you can. (note that a professional expert or personal financial planner can be very helpful to you in this step)

Tip for Impulse credit card addict buyers

Try this, at least once! Place your credit card in a plastic container, the bigger the better, and fill it with tap water, place the container in the freezer and let it freeze. Next time you get the itch to buy on impulse, You CAN'T! it's frozen. You still can use the credit card though, but you got to take it out of the freezer and let it melt naturally at room temperature, remember that you have to wait for a while before you can use your card, because attempting to accelerate the melting process with the microwave or stove isn't an option because heat will destroy your credit card data; this will give you the time to reflect and think how badly you want that item, are you willing to add to your debt? Can you afford it?

Now that you've completed your first steps towards living a debt-free life. Here are the three strategies that will work equally well in helping you with your first journey towards financial freedom.

Strategy ONE: 10% 20% 70%

This strategy is my personal favorite. Because it helps you to save, pay off debts and still live comfortably. Basically, you take out 10% of your pay check ( or monthly income) and put that into savings. Use 70% of your income for living expenses for the whole month. Including clothing, entertainment, medical bills..etc., but don't spend more than that. Now you are left with 20% which you will divide equally between your debts till each one of them is fully paid off. It may take time and dedication, but you'll pay it all off without starving yourself and still have a healthy sum in savings by the time your debts are all paid back.

Strategy Two: 40% 60%

This strategy is a little tougher to live with, but what's cool about the 40-60 strategy, is that you'll be done much sooner with paying all of your debts. For the whole of the 40% goes to paying your debts, and you commit to living on no more than 60% of your income. Once your debts are all paid out, you can adjust the percentages if you like, and start saving the portion you used to use for paying debts.

Strategy Three: Debt Snowball

This one is quite fun actually, for you can choose either strategy 1 or 2, as far as percentages go. Then you use the percentage set aside for paying debts by paying off the smallest debts first. This way, you will have paid back one debt in full much sooner than you otherwise could. This also will greatly motivate you to keep going and help you stay committed to your plan.

What you also can do, is to divide the sum available to paying your debts into a number of smaller sums (equal to the number of your debts) however, you make one sum the largest which goes either to your smallest debt or to your most urgent debt., or you can have two large sums for both the most urgent and the smallest debts. The rest, you divide equally between your other debts. And you keep at it, till you see them one by one, paid off and off your back for good.

Now that you have chosen your strategy and have a plan in place, commit to yourself and your plan; to see yourself become free of debt and enjoy life more.

On a final note, as you enjoy watching your debts shrink month after month, it would be very wise to find yourself a professional financial expert and explore with him/her how you can create a larger plan for your life's financial freedom. Protecting and Investing for your future can only be good.

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