03.06.2022

HOW TO GET RID OF BAD DEBT?

Unnecessary debt - the most common mistake of young people

The reasons we are indebted to us are usually the result of costly life events, such as major home repairs, buying a car, having children, needing treatment. Others, however, involve ill-considered costs for things that are not essential.

Such "whims" provide us with a higher standard of living than we can afford, at least for a while. Poor financial management or late payment are also common mistakes that lead to debt drowning. Thus, many young people fall into unnecessary debt, which haunts them for years.

Any high interest rate loan is bad debt. This may include quick payday loans or unsecured personal loans. High interest rates can be difficult to repay by the borrower, which often puts him in a worse financial position. Borrowing from acquaintances can also impose even more serious obligations on you if you have promised too short a period to repay the money.

How to avoid unnecessary debt?

Stick to a budget

You need to start tracking your income and expenses. Determine what you can afford based on what you earn. You need to make a budget plan every month, anticipating unexpected expenses ("miscellaneous"), because they will certainly come, and when you are not prepared, you may be tempted to take out a loan to cover these costs. Record each expense (even optional) in the appropriate category and make sure you distinguish between recurring and one-off expenses.

Save in an emergency fund

Spending a little money each month will be useful when you face unplanned expenses. The emergency fund will save you from indebtedness when you have to incur certain expenses, for example, when there is a need for unexpected car repairs, replacement of household appliances or a health problem. Maintaining an emergency fund can save you a lot of headaches and prepare you for unexpected events in the future. It is important that you do not abuse these savings and use them really accidentally.

Live to the best of your ability

Try to pay in cash whenever possible. If you can't afford to buy something without using your credit card, it means you don't have enough money to buy it. In this case, it is better to refrain from buying than to pay with "future" money. This is one of the most dangerous traps for credit card holders - to live with the illusion that they can afford a life that is really beyond their means.

Avoid certain purchases

Don't make impulsive purchases, especially when it comes to large sums. Apply the 24-hour rule to consider whether you really need the purchase. Always compare the prices of the product in different stores (online) and if you do not find a good price, wait for a discount/sale. Another option is to buy a similar product at a cheaper brand. Also, avoid "buy now, pay later" offers, interest-free financing and other similar schemes that will cost you too much.

Maintain your employment

In these uncertain times, good work is not always a given. Ideally, you should be competitive and able to pursue a variety of lucrative occupations. This will avoid the financial blow of rising inflation and ensure a secure source of income. Everyone can maximize their potential by developing and improving their skills, and by creating useful work contacts that open new doors. Keep up with new trends in your field to get a fair pay for your work.

How to get rid of bad debt?

Pay on time every month

Paying off all your loans on time each month is one of the best things you can do for your loan. Take all the necessary steps to make sure you don't miss a payment. You can set up automatic payments or payment reminders through your bank. If you find that you have difficulty "juggling" all your loans and maintaining payments, a pooling loan or debt management plan may be helpful.

Choose the most appropriate strategy

If you have the opportunity to allocate additional funds, direct more money to the debt with the highest interest rates. Of course, you must continue to make the minimum payments on each account. In the long run, this will reduce the total amount of interest you pay. Another approach is to try to pay off the smallest loan first, because you will be able to handle it the fastest. This will reduce the total number of loans, which can provide you with inner peace and more motivation to eliminate your other debts.

Refinancing or renegotiation?

Usually, the refinancing of a loan is done in order to change the terms of the loan and reduce the cost of repaying it. Refinancing can be done both in the bank from which the loan was withdrawn and from another financial institution. In most cases, however, refinancing has a better and more cost-effective alternative - to achieve the required terms of the loan by renegotiating the parameters of this loan with the help of an additional agreement to the contract.

Limit desires and focus on needs

There is always a way to limit some unnecessary expenses in your personal budget. Needs are usually your basic living expenses, things related to your health, or expenses that are necessary to do your job, raise your children and support your family. Desires are things you choose to buy to pamper yourself and live more comfortably, but they are not essential. For a while, give up restaurants, shopping, unnecessary subscriptions, expensive hobbies. By putting needs ahead of desires, you will be able to save faster and more efficiently to clear your debts.

Increase your income

If you are happy with your current job and your boss is happy with you, now is the time to ask for a raise or salary increase. If you do not work full time, start a second job, even short-term, to cover at least a few installments. Look for ways in which your interests could earn you extra money. Think about all the skills you have (such as writing, translation, web design, programming, beauty services) that you can offer in the job market. Sell ​​all old clothes and junk online, rent a room at Airbnb, think "out of the box".

With enough creativity and perseverance, you will find the best way for you to save yourself from bad debt. But, of course, it is best not to fall into it at all, so plan your budget and spend wisely.