How to Become Debt Free: Debt Repayment Strategies That Work
Do you know what the number one method to become debt free is? Well, never borrow. Or, if you have borrowed, pay back. However, for many people borrowing money is a compulsion and paying back is difficult. If you have a debt, how do you pay it fast and become debt free?
Paying Your Debt Faster
Generally speaking, debt are of two types, short term debt and long term debt. Whether you have a short-term loan (like credit card bills) or a long-term loan (like a mortgage or car loan), you can pay your debt faster if you really try. So, how do you do it?
Paying Off Short-Term Debt Quickly
There are two ways to pay back your short term debt
Cut down on unnecessary spending and use that money to pay off your debt.
Work part time and do side hustle to earn extra money and use that money to pay off your debt
The basic idea is to generate extra income and save money so that you have surplus money to pay off your debt. Spend money only on things you really need, not on unnecessary stuff until you pay off your debt. You need to ask yourself “Do I really need to buy new shoes, clothes, dine in a fancy restaurant, go on a vacations, when I still have debt to pay?”
Paying Off Long-Term Debt Quickly
If you have a long-term loan, like a 25-year mortgage, you can pay it off in just 10 years with these strategies:
Instead of paying 12 easy monthly instalments (EMIs) in a year, pay 13 EMIs, one extra EMI every year.
Increase your loan EMI by 10 percent every year.
By doing these things, you can pay off your 25-year loan in just 10 years and end up paying 50 percent less interest compared to if you had paid it off over the full 25 years. The idea is to pay more than your minimum loan repayment. The more money you spend on debt repayment, faster you will come out of debt.
Debt Repayment Strategies That Works
Here are some debt repayment strategies that you can try:
1. Pay your high interest loan first, and concentrate on low interest loan only when you have paid your high interest loan.
2. Pay your small loan fast and focus on bigger loans once you have paid your smaller loans
3. Go for debt consolidation. However, make sure your new interest rate is lower than the average interest loan before consolidating your debt.
When Paying off Debt is More Important than Saving or Investing
The total market value of Apple Inc is $2.72 trillion. Apple has $202.6 billion in liquid assets (cash and investment). Despite sitting on the pile of cash, apple frequently borrows money and now Apple’s total debt is $287.91 billion. If the company wants, it can pay most of its debt bit it continues borrowing.
When apple borrows, they have strategic financial plans, however, for common people the first step of improving finances is by paying off debt. You need to save and invest to build your wealth. However, you can start saving and investing only when you have paid off your debt. If you borrowed for investment purpose, and if you are earning more return on investment compared to the interest you are paying on your debt that could be good move. However, for average people paying off debt is the best way to build financial health. Paying debt is even more important during the recession as the interest rates are increasing and you will be paying more. Therefore, you will have to increase your repayment amount.
Investment and paying off the loan or debt, both are very important. If you can manage you should give importance to both. For instance, you should pay your credit card bills and also invest at the same time. However, you cannot choose one over the other. That's because when your debt piles there is no point in investing because you might have to sell off your assets before they give you proper returns to pay off your debt. If possible you need to pay off your minimum due, without incurring any additional fines and interest and also invest some money.
Investing With Loan and Repaying Loan
If you want to start a business, you need money. However, if you do not have money to invest, you need to acquire money. You can do this in many ways, one by borrowing from your friends or family or from banks and financial institutions. A lot of people are against borrowing from banks and financial institutions because they will have to start repaying loans long before their business starts generating income. Therefore, there is a risk in starting a business with a. However, when you have a good idea and if you believe you can work on this idea to make a profitable business, you can get a loan.
You can get a business loan to run your business, a house loan to buy and construct a house, a car loan, etc. However, most banks do not have this loan type where you can write “to invest in stock market” or “to invest in mutual funds” as the purpose of the loan. Therefore, you will have to apply for a personal loan and use it to invest.
However, the question is whether it is safe to use your loan money to invest, in other words, do you get a better return from your investment compared to what you pay for the loan repayment? Is it wise to invest in something risky like the stock market through a bank loan? Stocks do not start giving returns immediately. How will you pay your loan installments until the stocks start giving dividends?
You should get a loan for investment only when you are sure that the return is higher. Never buy liabilities with a loan.
No matter what kind of loan you are getting, not just personal loan, the most important things to consider is how much interest you will be paying on your loan. The second thing is to consider is loan term. Longer the term, more money you will be paying on your loan interest. Third thing to consider is loan repayment. How much money do you need to pay for your loan, is your loan repayment amount less than 10 percent of your monthly income. Fourth thing to consider is how are you going to use your loan money, are you buying liabilities or assets.
