One of the best steps to complete financial freedom is getting rid of bad debt. what is a bad debt? bad debt is simply a recurring debt that doesn’t give you the leverage to enjoy financial freedom even when you have access to some amount of money bad debts will cause you to spend on debts when you should think of rather investing or saving.
Why is debt bad?
As I earlier explained, a bad debt limits your opportunity to evolve in every circumstance. it reduces your financial power and financial index. a bad debt limits your guarantee of financial freedom. let’s look at some of the examples of debts
1. Secured debt: this is the type of debt where the borrower(lender) puts up a valuable asset (collateral) which is usually sometimes equivalent to or more than the amount of the money borrowed.
1. Unsecured debt: This is the type of debt where you borrow money and it doesn’t require the act of putting down collateral in form of an asset.
2. Mortgages: a mortgage is also a form of unsecured debt. The mortgage allows you to purchase something on a loan to pay back with interest over some time.
3. Revolving debt: this is the type of debt that comes in every period. as the name implies, it revolves and it takes up to 50% of your actual monthly budget. this type of debt does not allow you to save.
4. Inherited set: This type of debt is one that was passed down from one person to the other. usually from person to person or from organization to organization or from one government to the other.
How to get rid of bad debt:
The best ways to reduce bad debt are highlighted Below: Please note this is not financial advice but a little recommendation.
1. Spend less than you earn: Almost everyone will tell you this, to spend a little less than you earn. it is the simplest yet most important step in clearing off bad debt. you don’t have to spend excessively while you’re on an incurred debt. do not spend more of your weekly wages or monthly salaries at the grocery store, or to buy food items and electricity. you must deprive yourself of some things which take up your finances and learn to live on a budget while you’re in debt.
2. List out all your debts: Although this might not seem like yet an actionable step, it is required. first off; you cannot pay off your debts all at once so it is important to document your debts. start by arranging them in ascending order i.e from the lowest to the highest. these might include car debts, student loans, mortgages, etc. once you have successfully listed your debts in this form, you’d be able to understand which one to tackle first.
3. Pay off debts from the lowest to the highest: this step requires you to pay off your debts according to what Dave Ramsey describes as the snowball method. if your debt ranges from $5000 to $30,000 it is quite easier to pay off the one which is around $5000 than start from the one which is $30,000 down to $5000. paying off lower debts should be prioritized first before the higher ones.
4. Pay minimum payments on other ones: Dave Ramsey’s snowball method of clearing debts does not mean you should completely ignore the other outstanding debts. it is expected to try as much as it’s possible to pay off part of your other outstanding debts as this will guarantee you some sense of relief especially if your higher debts attract interest on either a daily, weekly, or monthly basis.
5. Engage in side hustle: Apart from your weekly wages or monthly salaries and stipends, you should engage in some side hustle as this will help you take care of smaller home needs, while you completely turn your focus on paying off your recurring debts.
6. Seek help from Experts: if you experience a little bit of difficulty maintaining or paying off your debts, you should seek the help of an expert who has a level of experience in managing excessive debts. you may also seek advice from a financial institution although this may not be required. they will help you analyze your various debts especially if it’s more than one.
7. Try to evade other debts: In your efforts to clear off debts, try as much as you can not to involve yourself in activities that will add to your already existing debts. while you are trying to settle a debt, do not borrow or lend again. an important rule of thumb is that you should not borrow to clear off another already existing debt. this will limit your chances of escaping a bad debt. this is why I highly recommend that you read step one and have a better understanding of it so you can live on a lower budget while you tackle your serious debts.
8: Ask for support: asking for support from friends, families, business associates, colleagues and others can be helpful if they choose to assist you in clearing off bad debt. talk to your family members, co-workers, colleagues, and friends if they can assist with a little contribution. this will help in the process of clearing a bad debt.
9. Be consistent: Once you start paying off your debts, try as much as you can to consistently pay your debts. try to remain consistent and committed to paying off your debts. if you don’t, there’s a chance that the interest rate on one or more of your debts will increase and this will affect you. the best advice is: if you are paying off your debts on a weekly or monthly basis, it is important to pay them off in that manner. that way, you won’t skip paying off debts until it is partially or completely paid off.
10. Do not create budgets while you are paying debts: do not introduce new highly engaging budgets like the purchase of a car, or construction of a building except if your financial index is high. nonetheless, try to limit every form of the budget which is outstanding and needs much financial attention.
Conclusion: clearing off a bad debt can be a tedious task, but if you follow the steps we have highlighted here, you will be able to survive bad debts and live a better life that is free of debts.