It is without doubts that managing our debts seems to be one of the most difficult things we face in our everyday life. You should know that you are not the only person going through this problem. Lots of countries and corporations over the years have suffered because of debt mismanagement, causing lots of jobs lost and misery. The Latin American country of Argentina was an example of a country with tremendous growth potentials and a very promising future but given that the country grew with lots of debts, there became a time that the country was not able to meet its interest and principal debt obligation which has had a very negative impact on the country’s growth till date.
Also, the main problem that caused the economic crises in the USA in 2008 was the high level of leverage that financial institutions had amassed during the past years. This was the principal cause of the economic crises which lead to a great loss of value in the stock market and a negative world growth.
My pointing out these examples is not to tell you that debt is a totally bad thing in a society. No, that’s not my point. As a matter of fact, debt is a very good thing for a society and for individuals only if it is well managed. If there is no debt in the society, there will be very limited growth in that economy because people will spend just what they end. But with the presence of debt, individuals and companies can spend more than what they earn, there by fostering growth in the society. The importance of debt to our growth and wellbeing will be a topic for the near future. What I am trying to make you understand is that managing our debts is something that affects everyone including societies, countries, corporations and individuals at top stages.
The big question is why then does the problem of debt management seem to be affecting everybody in the society even the most educated Financiers, economist and accountants?
The answer is simple. “Because we are being thought how to make money but we were never thought how to manage the money we earn and have at our disposal.
I can tell you this with great conviction because being a Financial specialist, I too have gone through the dark moments and torments resulting from debt mismanagement. Debt can take you through a lot and can put you through lots of fear and stress. I can only imagine myself with the financial knowledge and still, I went through the torment’s debt mismanagement can bring. What about the masses of individuals who have no financial education?
Let me reiterate again that you should make no mistakes about my point of view, I don’t think all that debt offers is bad news. if all about debt was bad, then you will not see all these rich people, rich economies and rich corporations taking lots of debt. There are some very good aspects about having credit at our disposal and managing it well as I said earlier. However, my reason for writing this piece, is because I have gone through a lot when it comes to debt mismanagement and I am just trying to share the steps I learned while coming out from my debts, hoping that this piece can be helpful to some individual out there who is going through a similar problem and finding it difficult to sort out his/her difficulties.
Given that up until this moment, debt has been one of the best leverage mankind has ever seen I can tell you without missing words that affordable debt is free money. You were not making mistakes when you were accepting your credit. The mistake you made was managing the credit irresponsibly. The same mistake I made some years ago is the same mistake you have made. But given that I had to go through a lot to get myself out of debt, I have developed some 7 steps you can follow to remove yourself from debt, become debt free and start all over again.
The first step to follow is to
- MAKE A DETAIL ACCOUNT OF ALL YOUR EXPECTED OPERATIONAL INCOME FOR THE COMING MONTH and MONTHS.
It means you should take control of your future, it means nothing is suppose to surprise you about your future income, it means you should make a detail inventory of all your expected operational income for the next month. Your operational income will involve all your income that you are very sure to earn the coming month (this should be your monthly salary or for those doing business, it should be the average minimum sales you make every month. What I am trying to say is it should be your most certain source of income.) From which you should subtract all your operational costs. Your operational cost here will refer to all your must- do expected expenses that you are 100% certain to incur next month (these type of expenses will include; house rent, business rents, food, light and water bills). These might not be the same every month but I hope you understand where we are driving to.
All the revenue you are 100% certain to generate next month (minus) All the expenses you are 100% certain to make next month
equals the Operational income of the month.
This first step is very important because it will help you to know exactly what you will have at your disposal to be able to make debt repayments. You can only pay your debts when you have covered your necessities. The income you will have on you after covering these necessities will be your operational income. This is the income with which you have to make your debt repayments, so I expect you should have an approximate knowledge of how much that amount might be. After knowing how much your expected operational income will look like, then you move to the next step.
2 HAVE A PERFECT KNOWLEDGE OF WHAT YOU OWE. (KNOW ALL YOUR DEBTS).
In this step, you are expected to have a perfect knowledge on how your debts are structured, how much you are supposed to make as interest and principal repayments every month or every after 15 days. (check our blog which explains how you are supposed to read your debt amortization)
You can now divide your operational income for next month in step 1 with your total interest and principal payments due for next month in step 2. If your ratio is closer to one, for example if you have a result of 0.869 after dividing 2,000 of your operational income by 2300 of interests and principals for all your debts due for next month , this means you have the ability to pay almost all your debts for the next month. If you have a ratio of one, this means you have the exact coverage to take care of your next monthly debts. I don’t expect you to have a result of above one, if you had such a result you won’t be reading a piece of what you need to do to get out of debt.
Now let’s move back to the point where you have a result of 0.869. this sort of result might not be too scary because here you can just make some little sacrifices like forgoing some social activities and trying to divert a portion of your debt which will not impact you negatively in terms of the interest rates you have to pay in the following months and years.
Note that when you are in a tight spot with lots of debt on your plate, you should not be worried about your credit points. This has to be the least of your worries. You have more to think about at this point than some credit points which you might not even need anyways.
Those with a result of 0.5 and below is where we find things a little concerning because this tells you that you actually will have very limited money at your disposal to be able to make your principal and interest repayments. Don’t panic because you can still make this go away. This will lead us to the next step. Which is
3 MAKING THE SALES OF ALL NON-OPERATIONAL ASSETS ON CRAIGSLIST AND OTHER SALES SITES.
If you thing that it will not be possible to have an above one coverage ratio from step 2 for the next month and the following months, then you should select all the assets you own that are non-operational. Your non-operation assets are those things that you own and have not used them for the past 2 years and they still will not be of use to you in the next 2 years to come. This could be common to some ladies who have dresses, shoes and all sort of things which they have not worn or used for the past 4 years and it is just lying in there. These assets do not have any use to you and will not be of use for a while so you can put them up for sale in craigslist or other online sales sites to make a little bit of extra money so you can at least settle your interest on all your debts. However, it should be noted that this solution is only a short-term solution for a debt issue that will last for a longer time period. Still, if this money is not sufficient, then we move on to the next short-term solution. Which is
4) DIVIDE YOUR DEBTS INTO ESSENTIAL AND NON-ESSENTIAL DEBTS.
After trying some little tricks to make some extra money and you realize that you still are not getting to a ratio of one, then comes the next step which is to divide your debts into Essential and non-essential debts. Essential debts are those debts which you can’t afford to default such as your rents, mortgages, bank loans, etc. they are those debts which have very high interest rates, generally with a very high cost if you default. While non-essential debts are those debts with very little or no consequences in case of default. Examples of such debts can be a debt with your family, or friends.
After carrying out this procedure, you can then proceed to repay your essential debts. However, you should note that this your debt repayment problem, will be reoccurring for a period of time in the future, so you can’t use a short-term solution for a long-term problem. Which leads us to the 6th step on getting out of debt.
5 DEBT RESTRUCTURING;
If after these 4 steps, you still cannot make the minimum payments, and you realize that this problem will persist into the near future, then the next stage is debt restructuring. In this stage you have the right to go to the bank or loan office and ask for a debt restructuring. This debt restructuring might come in one of the following ways. You might be asked to pay less than the total amount you owe, or you might be given a pause on your loan payment for some time, or they might reduce the interest rate on the loan, and lastly, You should be given the opportunity to choose from one of these options. Now, which one to choose will depend on your personal situation. You can basically analyze each scenario and see which one best fits your situation. Don’t be afraid it’s your financial right to ask for a debt restructuring if you can genuinely show that you are not able to pay the debts at the moment. The bank will be obliged to restructure your debts and make it more convenient for you to be able to make your debt payments. This will lead us to the 6th step
6 GET A SIDE HUSTLE AND MAKE YOUR OWN TIME PLAN TO REPAY THE DEBT.
After restructuring your debts, if you still are finding difficulties in making the necessary payments, then you will have to return to the bank for them to suspend your loan for a later date when you have picked up a job and are able to make your debt repayments. Don’t be afraid because when you get to this stage, the bank has gotten just two options, the first is for them to send your details to a debt collecting firm whose job is to call you as many times as possible to see if they can get some money out from you, or the bank can decide to take you to court which is not an eligible option for them to do because the law will never send you to jail . Instead what the court of law will do in this case is they will ask you when you will be able to pay the money and if you tell the law that you will pay in 20 years, the law will take you for your word because that is all you can offer at the moment since the court of law does knows better that sending you to prison is not a viable option as being in prison will not give you the ability to pick up a job and start repaying your debt. You must know by now that no bank will love to take you to this stage because It becomes detrimental to them. This will lead us to the next stage of getting out of debt which is
7 TAKING ADVANTAGE OF INTEREST RATE FLUCTUATIONS ESPECIALLY DURING PERIODS OF CRISES.
Interest rate fluctuation is a very important variable you need to consider when you are in debts. You should be vigilant to the interest rate situation around you because, most of the debts we owe come with fixed interest rates whereas the interest rate of the economy and the society always fluctuates because of the economic situation at each given moment. Mostly when the central bank wants to stimulate the growth of the economy, they turn to reduce interest rate, which gives commercial banks the ability to also make loans available to the society at a very low interest rate. During such moments, if you have fixed interest rates which are higher that the interest rates commercial banks are offering at the time, you can borrow at a lower interest rate and use the money to repay your old but higher interest rate debt. Given such a situation, you will be left with the same amount of debt but with lesser interest rate, which automatically puts you at the advantage of making payments with lesser interest rate and consequently lesser debt to be repaid.
I believe after going through all of these steps and stress, you should have found a solution that will help you resolve your debt problems.
My advice for you is that you should stay strong. The very fact that you have this problem, is because you are capable of resolving it. So just keep calm and follow these steps and I am very positive you will be ok.
My next advice is that when you begin making some extra cash, you should start making faster repayments on your debts with higher interest rates. Why? because interest rates are just the cost you pay for using someone else’s money. And the interest rate is higher when the principal is higher. You want to pay as much principal as possible so that in the next period, the same interest rate will be applied on a lesser principal and so you will have to pay lesser than was expected of you. For a better understanding check our video on how debts and loans work.
Hope this has been of help to you in some way. If not then you can get in contact with my team and we can study your case and give you a plan of action.