Pay your debts

As I previously mentioned in my guide on How to become financially independent, the first step in becoming financially independent is, first of all, becoming Financially solvent (which means being able to meet your financial obligations with external help). That means that the first step we have to take in our way to financial independence is to take care of our debt.

Debt drags us backward, it limits our capacity to grow and becomes a burden that can make it very hard to break through financially. being in debt is to constantly think and take care of what you did in your past, instead of planning your finances and investments for the future.

Obviously, no one wants to be in debt, let alone constantly paying your previous debts as the cycle continues, but what can we do about it, or even better:

How can we get out of debt?

  1. Understand how much you owe

  2. Learn the details

  3. Create a repayment plan

  4. Control your expenses

  5. keep moving forward

  6. Start saving


1. Understand how much you owe


The first step in overcoming any problem is to first acknowledge it and asses it.
Seems pretty simple right? but when it comes to debt, that simple act of acknowledging your problem might seem trickier than you think.

Even though it may seem daunting, it’s important to understand the total amount of debt you owe to all debters. Having a clear understanding of the numbers will empower you to make a repayment plan that actually works.

The problem in assessing your debt might arise from having multiple credits cards, multiple bank accounts, multiple loans or even multiple back payments.

In order to have a clear understanding of your total amount owed simply create a spreadsheet in Excel or link your credit cards to a free app that will compile the information on your behalf.

2. Learn the details


After you’ve determined the total of all your debts and the total amount you owe, it’s time to dig a little deeper and read the fine print about each debt, and more specifically

  • what is the Due date for each payment
  • what is the minimum monthly payment
  • how much is the Interest rate

It’s critical to get to know the details of your every debt as they will ultimately help you prioritize your debts and create your repayment plan

make a simple word doc or excel sheet listing all your individual debts according to their due dates from the closest (and most important to pay) to the longest, take also into consideration the debts with the highest interest rate (and bump them to the top of the list).

3. Make a repayment plan


Now that we have a much better understanding of our debts and the specific conditions of each debts, its time to make a plan.

Every person is unique, and thus, every repayment plan is unique and should be well suited to your specific needs.

Think about what is important for you:

  • maintaining your liquidity with small payments over a longer period?
  • ‘killing’ as many debts as soon as possible even if it means big payments?
  • starting from the small debts and moving to the big debts?
  • attacking your big debts first to make it easier for later?

as i said, there are different solutions for different people, but its worth mentioning at least 2 proven debt repayment strategies that been researched:

  • From small debts to big ones or the ‘Debt snowball’: Coined by personal finance expert Dave Ramsey, the debt snowball method focuses on paying off first the smallest of your debts first, while maintaining minimum monthly payments on all other debts. As each debt is paid off, the money that was used for the previous debt is “snowballed” and used to pay the next smallest debt. This process is repeated until all debts are gone. Even though this strategy might not save you as much money on interest fees, some people find it motivating to pay off one account at a time and to clear the least of debts one by one. This approach might be even more effective especially if you have many small debts that are relatively easy to clear one by one.
  • The Top-down approach or ‘Debt avalanche’: In this approach, Instead of focusing on the debt with the smallest balance, the debt avalanche focuses on paying off the debt with the highest interest rate first, while paying minimum monthly payments on all other debts. After that, focus on the debt with the second-highest interest rate and repeat the process until all debts are gone.
    This approach is especially effective if you have daunting debts with a higher interest rate that you have to clear in order to release more monthly liquidity in order to take care of other debts. (think mortgage, big loans with big interest, etc.)

4. Control your expenses


After we finally acknowledged our debts, estimated them and made a repayment plan it’s about time to look at the problem that got us to debts, to begin with: Spending!

unless you plan to start a monastic life or move to the Himalayas and live on the fruit of the land I think it’s safe to say that in the modern world there isn’t a way to really avoid spending entirely.

Rent, food, electricity, water, Wifi, and the list just goes on and on.

But coming to think about it, all those things are what we need in order to live, right? and even more than that, these are the things we need in order to succeed and make more money.

Every business needs electricity, everybody needs Wifi to access the internet and everybody needs to drink, at least every few days 🙂

I think what I’m trying to say here is that is the fact you are spending anyway does not mean that you cant become more calculated at it, more controlled, and even more effective at it, and get more for your money!

If you haven’t already, check out the guide i wrote here for a more detailed description of How to control your expenses.

5. Keep moving forward 


Whether you’ve just started paying your debts with a modest 100$ repayment or tackled your 3 biggest debts and paid them off it is always important to acknowledge your accomplishments and celebrate your successes.

The point is that we keep moving forward, big or small, tiny or huge, every step matters as each one gets you close to your goal.

Keeping a record of the journey to be debt-free and financially independent will help get traction and momentum and improve your understanding of how much you are really able to achieve.

Keep a small journal with all your pending debts, payments and remaining amounts to be paid. every time you close one debt cross it off your list and try to assess how much time it will take you to tackle what’s left.

Trying to reduce that amount of time by allocating more funds to debts repayment will help you speed this process even more until you will reach your goal and be debt-free!

6. Start saving 


Now that we are free and clear of debts, things start to look different.

Every new income we receive now can be focused on what really matters: instead of paying for the past, its about time to start thinking about the future!

This is the biggest and most important between people that are struggling financially and people that are in control of their finance. people that are in control of their financial plan for the future and constantly save and invest!

For a quick guide on how to start saving and a few strategies that will help you save more effectivly, check out the guide I wrote about How to start saving.