Although long-term debt can be a useful tool to manage financial obligations and create liquidity, short-term debt can be a shekel if it is not used responsibly. When short-term debt, usually with high-interest rates, spirals out of control, it is time to tackle it strategically and effectively. In this article, we will discuss some considerations to help you pay off debts strategically and take back ownership of your financial well-being.
Prioritise High-Interest Debt
Start by listing all your debts, including credit cards, loans, and any other outstanding balances. Include the interest rates and minimum monthly payments for each debt. This will give you a clear picture of your debt landscape. Then go on to identify the debts with the highest interest rates. These debts are costing you the most in interest charges, so focus on paying them off first. Allocate more money each month towards these high-interest debts while making minimum payments on others. If there is any additional money left at the end of the month, use it to further repay the highest interest rate debts.
The Debt Snowball Method
If you are feeling overwhelmed by the debt you have accumulated and the various accounts, a different approach may be more beneficial for you. The debt snowball method focuses on building momentum and motivation by paying off the smallest debt amounts first. Start by paying off the debt with the lowest balance while making minimum payments on others. Once the smallest debt is cleared, use the money you were putting towards it to tackle the next smallest debt. This method provides a psychological boost as you see debts being eliminated. Even if it may not save you as much on interest as the above-mentioned approach of repaying the highest interest rate debt first, it may be what you need to keep you motivated.
Change Your Lifestyle
In extreme situations where a lifestyle is being maintained by short-term debt and it has come to a point where it has taken over every aspect of your financial situation, it may be necessary to downgrade your lifestyle. This may be a bitter pill to swallow and very hard to do, and although it will not initially feel like it, your future self will thank you for taking back control of your finances. The first step is to be honest with yourself and those close to you about the situation. From there, identify which aspects of your lifestyle you can’t afford or are luxuries that you can live without. It may be time to trade in your car for a more affordable model or cancel your December holiday plans and think outside the box about how you will be making lasting memories at home. Understand that this lifestyle change does not have to be permanent and that you can again upgrade your lifestyle when you are in control of your finances.
Some other things you can consider when you are serious about crafting an effective strategy to eliminate debt:
- Negotiate lower interest rates: Reach out to your creditors and explore the possibility of negotiating lower interest rates. Sometimes, a simple request can lead to a reduced rate, especially if you have a good payment history.
- Consolidate debts: Debt consolidation involves combining multiple debts into a single loan with a lower interest rate. This can make repayment more manageable and help you save on interest costs. Be cautious about the terms and fees associated with consolidation and avoid accumulating new debt after consolidation.
- Increase your income: Look for opportunities to boost your income, such as taking on a part-time job, freelancing, or starting a side business. The extra income can be directed towards paying off debts faster.
- Celebrate milestones: As you pay off each debt, celebrate your progress and the discipline you have maintained. Recognising your achievements will keep you motivated to continue your debt repayment journey.
- Seek professional advice: If you find yourself struggling with debt management, consider seeking advice from a financial counsellor or advisor. They can provide personalised strategies and guidance tailored to your specific situation.
Remember, paying off debts strategically requires discipline and commitment. It may take time, but the sense of financial freedom and reduced stress that comes with becoming debt-free is well worth the effort. Stay focused, stick to your plan, and gradually work your way towards a debt-free future.
