How to Get Out of Debt

Get out of debt by following a basic financial plan that forces you to live within your means and save the excess funds or pay back debt. Millions of people around the world are in too much debt. They have borrowed because interest rates were very low, and the banks allowed them to borrow more money. However, when interest rates return to normal levels these people will suffer debt stress. They won’t be able to afford the higher repayments and may default on their loans. This sounds like the global financial crisis again.

Debt is the Way of the World

Today’s society has grown up thinking that you have to get into a lot of debt to buy the things you want in life. When you are young you have to borrow money to buy a car and home. There is no way you can simply save up enough money to purchase a home without a mortgage. You are virtually forced into having a large mortgage when you are young. Otherwise, you will be renting forever.

While it’s true that millions of people are in debt, being in debt is not truly living the dream.

Living the dream is having a lot of capital. Yes, you may have some debt. But the debt must be employed to fund investment properties that generate income. A mortgage on your own home is not doing anything for you. Yes, there is a capital gain over time but it’s like renting. The interest payments are not tax deductible in many countries.

We need to learn to live within our means. Save some money before we buy the nice things we want. Live like a poor student for the first few years of our working lives to save money. Learn to save a larger deposit for a home. Buy a cheaper home first and build up to a luxury home later in life. When you are young buy a used car that is more affordable. Buy a new car later in life when you are wealthier.

Avoid Borrowing Large Amounts of Money

Once you incur debt, you become contracted to repay the lender. You cannot save as much of your income as before the loan repayment.

Saving money and investing that money for the long-term is the key to building wealth. You must save a reasonable proportion of your income every month. Otherwise, you will never build up capital and will always be in debt. Every time you want to buy some product or service you will need to use a credit card. You will get yourself into too much debt and never get out of debt.

Borrow Money for Investment

Only borrow money to fund investment property. The money needs to be invested in property that is rented. Tenants and the tax deduction pay for the bulk of the property. After many years you make the capital gain. The best advice I ever heard was “get someone else and the tax man to pay for your investment property”.

Compound Interest Explained

Borrow to Build Your Credit for the Future

You never need to borrow, when you are young, to build up a credit score for the future. If you have never borrowed money your credit score will be good. You don’t need to repay a loan to have a good credit history. Banks like people who have a high net worth and purchase everything with cash. A bank will lend you money, at any time in your life, even if you have never borrowed any money.

Budget to Get Out of Debt

Budgeting is a financial tool that all businesses use to manage their money. However, budgeting is not just a tool for business.

A budget tells you how much money you make and how you are going to spend and save it. All wealthy individuals work with a personal budget that helps them control their finances. Without a budget you really just don’t have a plan for your future.

When you don’t have control of your finances, you are at risk of going into debt beyond what you can afford. The key to staying out of debt yet having the freedom to purchase the things you want and need, is being able to budget for them and pay cash.

Live Within Your Means to Get Out of Debt

If you don’t earn enough income to fund your lifestyle, you are living beyond your means. Borrowing money only makes it worse because you have to pay a price for borrowing. The interest is the price you pay for borrowing. Interest is effectively throwing away your income. It’s difficult enough to get a good job, keep the job and earn an income. If you throw the income away on interest, you are going nowhere fast.

If you cannot afford to buy a product or service, don’t buy it.

Debt on motor vehicles is bad. You are funding a depreciating asset with borrowed money. You will be paying interest on a loan when the car is decreasing in value. Always buy a car with cash or borrow a very small amount. I have seen people with $20,000 cash borrow $50,000 to buy a $70,000 motor vehicle. Don’t do that. Live within your means and buy a cheaper car. Maybe borrow $10,000 maximum and repay it within 12 months to minimize the interest repayments. Or just buy a $20,000 car and be happy that you own it.

Keep an Emergency Fund to Get Out of Debt

Keep an emergency fund to cover you against any unbudgeted expenditure.

Spending money on car insurance, vacations or a birthday party is not an emergency. These items of expenditure should be included in your personal financial budget.

A real emergency is an unexpected hospitalization, a death in the family, or a car accident.

If you have an amount of money set aside for an emergency or unforeseen event it will prevent you from going into debt to pay for any unexpected problems.

Reduce Your Expenses to Get Out of Debt

Once you have set your budget for your monthly expenses, you need to work out how to reduce your expenses. The only way to get ahead in life is to earn more money than you spend.

How do you think rich people became rich? They spend less money than they earn over a long period of time. One of the greatest investors, Warren Buffet, is a billionaire but lives in a modest home and drives a modest car. He is fully invested to earn more money. The majority of his income is invested and reinvested for the future.

Take a long hard look at all your expenses.

Do you really need the most expensive internet connection. Shop around and look for a cheaper option. What about that internet TV service? Are you really watching all those channels?

Do you really need to purchase a cappuccino coffee twice a day? Why not once a day.

How much do you spend on dining out? Learn to cook some meals at home and save the difference.

All the money you save can be applied to reduce your debt balance.

Make More Frequent Repayments to Get Out of Debt

Many homeowners make a monthly mortgage repayment to repay their home loan.

However, their employer pays salary weekly or fortnightly.

If you repay your mortgage more frequently, like fortnightly, it will save you thousands of dollars interest over the life of the loan. You are still repaying the same amount, half the monthly repayment, but twice a month instead of once a month. You save have a month interest every month for the life of the loan.

Teach Your Children to Stay Out of Debt

Teaching your children how to save money for the future is a very important skill. Open a child’s bank account for them to deposit savings from doing odd jobs. Teach your children how to save for things they want, like computers, phones and bikes. Don’t lend money to your children. Don’t buy everything for them. Ask them to save up for some things. Tell them they need to learn about money. The earlier you teach them about money the more life skills they will have as adults.

Show your children your family budget. They will see that you only earn so much money and there are a lot of bills to pay. Your children will know that you only have so much money to spend and once it’s gone, there’s no more until next pay day. They will learn about financial priorities. The electricity, gas, mortgage, fuel and taxes have to be paid first. Then other less important bills are paid.

When your children see you budget your money, it will be easier for them to budget when they are grown up.

Let Your Teens Manage Their Own Money

Don’t baby your teens by managing their money. They have to learn adult responsibilities by managing their own money. When your teens get jobs and earn money teach them how to save and budget their finances to achieve their financial goals. Maybe they are savings for a new computer or a larger goal, like a higher education fund or motor vehicle.

By the time your teen is old enough to drive they may have saved enough to purchase a motor vehicle. Once they have reached tertiary education, they may have saved enough to fund the first year.

If you have taught your children from a young age how to manage money properly, by the time they are adults they will be less likely to get into debt.

Conclusion

Borrowing too much money, especially when you are young, can hold you back later in life. Taking on excessive debt now to get everything you want can turn into a nightmare, if you are not financially responsible. Usually, paying back all that debt inhibits your saving for later in life and retirement. Too many people get to the end of their working life with no savings for retirement. They have to rely on government pensions and handouts from relatives. Many are a burden to their own children.

It is Possible to Live with Low Debt or No Debt

Control of your finances takes self-discipline, like eating a good diet and exercise. To get out of debt also takes self-discipline and changing the way you think about money. Money should be seen as financial security for your future. If you need something, anything in your future, your savings are there to give you the ability to live a better lifestyle. And when you retire you will need as much money as you can get because things in the future are going to get much more expensive than today.