The debts Not only do they reduce your ability to pay, but they affect your peace of mind and can cause depression. In fact, those with depression are 4.2 times more likely to remain depressed after a year and a half if they have financial difficulties compared to those who do not. For this reason, it is very important to take charge of your finances to eliminate your debts or reach a healthy level of indebtedness. Do you want to get out of debt?
The good news: with a good strategy and discipline, there is a way to achieve it; the bad: this article can only give you strategy tools.
I cannot transmit discipline, because it depends 100% on you. In addition, I approximate that the discipline to change financial habits contributes 80% for your strategy to eliminate debts to be successful. So, while writing down the tips in this article, always keep in mind that simply reading this article will not give you a magical solution, and that it is ultimately your resilience and stubbornness to get ahead that will pay off in achieving your goal.
Tips to get out of debt as quickly as possible
First: Determine your current position
A good indicator is the ratio of level of indebtedness (called debt-to-income in English). To obtain this ratio, you must divide the payments you make on your current debts between your income, with a monthly period. Example:
- Credit card payment per month: $3,000
- Monthly auto credit payment: $3,500
- Mortgage payment: $8,000
- Monthly income: $25,000
- Debt Level Ratio: (($3,000 + $3,500 + $8,000)/$25,000)*100 = 58%
A ratio below 30% is a healthy level. A reason above 45% requires immediate corrective action, which is probably why you are reading this article.
Second: Since you know how to obtain this debt ratio, you must list all your debts
Said list must include at least: total amount owed, monthly payment and interest rate. You can obtain much of this data if you consult your account statements, or even request your credit history at the Credit Bureau or Círculo de Crédito (you are entitled to one free per year by law).
Third: The previous steps are simply planning
From here on out it’s all about execution. You must change your financial habits to:
- Eliminate superfluous expenses (outings to restaurants, concerts, etc.)
- Cut, if necessary, expenses for pleasure such as purchases of new clothes, subscriptions to streaming services, among others. Nobody said it was easy.
- Look for activities that can improve your income level, such as being an Uber on the weekends, giving classes or consulting, or even selling things you don’t need.
Fourth: Emergency Fund
Build a small emergency or contingency fund that allows you to stay on course even when there are unpredictable situations. For the urgent situation, I suggest 1 to 1.5 times your monthly expenses (compared to 3 to 6 months for a traditional contingency fund).
Fifth: Order your debts
Now yes, start paying the debts on your list in the following order:
- First you must pay all of your debts whose amount is less than $10,000 pesos in balance. If you have more than 1, start with the one with the highest interest rate.
- Then you must pay debts whose amounts exceed $10,000. Again, if you have more than 1, you should start paying off the one with the highest interest rate.
Important: This does not imply that you stop paying the others while you settle another; You will have to continue paying the essential minimum to avoid paying default interest or commissions (for example, in credit cards, you will have to pay, even if it is the minimum amount, even when said card is not on your list as a priority).
Sixth: Constantly obtain your level of indebtedness outlined in step One
Once you lower your level between 30 and 45%, you will be able to evaluate refinancing your outstanding debts with a loan at better conditions and rates. It is very important that if you choose this option you consider that your new credit should provide you with better credit conditions. Also, it is very important that you have not been late in your payments so that you can apply for the loan from a position of relative financial strength, as it is what will allow you to get the best conditions.
Seventh and last: Enjoy your new peace of mind and avoid falling into a similar situation with good financial planning.
I know. Outlined in these steps it all sounds very simple. And it can be overwhelming getting started on this project. The most complicated thing is not the steps or the instructions, it is having the mental strength to modify your habits so as not to lose sight of your objective. But give it a try, and I promise you that it will all be worth it. There are few projects whose reward is enjoyed so much, because the sacrifice is such that you yourself recognize the value of having achieved it.
Would you add any other tip to get out of debt?