How do you get out of debt? Debts are like shadows that follow us at every step. Sometimes life’s circumstances aren’t on our side and we slide into this abyss very quickly. Sometimes the situation is caused by our own lack of financial literacy. Whatever the reasons for our debt, they’re always unpleasant. In this article, we’ll give you 10 tips on how to get out of debt and how to prevent it in the first place.
Managing your money
The basic rule for managing your money properly is to keep track of your income and expenses. It’s astonishing how many people who earn a lot of money each month still have financial problems. That’s because along with high income, they also have high expenses. So first, in the income column, write down all the money that flows into your budget. Wages, business income, parental allowance, rental income and so on.
In the expenses column, write down all the expenses you pay every month. From your mortgage, insurance, food, utilities, right down to toiletries, clothing, hobbies, the hairdresser and so on. In short, everything. The difference between your income and expenses is crucial. From this difference, set aside money for regular investing and a cash reserve for unexpected events. You can use the remaining amount to repay any loan. Having a complete overview of your income and expenses stops you from exceeding the limit you can afford to repay each month.
How do you prevent getting into debt?
The primary rule is that you mustn’t spend more than you earn. Think carefully about what you’ll use the money you want to borrow for. Many people borrow money for expensive Christmas presents or a luxury holiday. The question is, do you really want to spend the next several months (or years) repaying a loan for a holiday? You can cut back on expenses that aren’t so important (for example, eating out often) and save up for the holiday instead. You’ll certainly enjoy it more than you would with the feeling that you’ll still be repaying debt for it long afterwards.
You can prevent debt with a financial reserve, which should make up 10 to 20% of your income each month. Set this reserve aside each month in a savings account (spořicí účet) for unexpected events such as losing your job or long-term illness. You can also use the money to repair your car or buy a new fridge without getting into debt.
How do you get out of debt?
In the points below, we’ll give you several tips on how to get out of debt so you can sleep better at night.
Start spending less
Not only does this prevent debt, it’s also one way to pay off a loan faster. All you need to do is visit coffee shops or clothes shops less often. Seemingly small items can add up to a large sum over a few months, which you’d be better off using to clear your debts.
Pay off the debt with the highest interest rate first
Many people prefer to pay off smaller debts before the more serious ones. However, it’s better to pay off the loan with the highest, that is, the least favourable, interest rate first. This eases the burden on your wallet the most. After that, focus on the less serious loans.
Don’t take on more debt
Some people deal with their poor financial situation by taking out even more loans. This only widens their debt hole further. Your primary goal is to get rid of debt. So don’t take out any more loans.
Increase your monthly payment
This is one way to get out of debt faster, but only if you can afford it. Your income and expenses table will clearly show how much you can repay each month. If your repayment is lower, it will take you a long time to clear it, and it will also show up in interest and fees. If your financial situation allows it, increase your monthly payment.
Stop using your credit card
A lot of people use credit cards as standard. They let you shop even when you don’t have money in your account. However, if you want to get out of the debt hole, stop using them. You need to learn to play only with the money you have. So freeze your credit card, or hide it away.
Use bonuses and overpayments
If a bonus from work lands in your account, or you get a refund for overpaid electricity, use that money to pay off your debt. However tempting it might be to spend that money on something enjoyable, your primary goal is to get rid of debt. If the money isn’t enough to cover the whole amount, use it to cover at least part of it.
Find an additional source of income
To get out of the debt hole as soon as possible, find an additional source of income alongside your job. This is only a temporary solution that will help you get back to a debt-free life. Use the money you earn only to pay off the loan. Don’t get carried away with the idea of buying something new with the money you earn.
Friends and family
Another way to get out of debt is to ask friends or family for help. The truth is, though, that most of us never want to “stoop” to this. However, if the due date is approaching and you have no other option, help from family can be the best solution. Although it’s not always the best solution, sometimes in a crisis there’s no other way. Agree on repayment terms and always stick to them.
Sell things you don’t need
We all have things at home that we don’t use. They might be useful to someone else, and you can earn money from them. There are second-hand shops, social media groups and other websites where you can sell these things and use the money to pay down your debts.
Consolidation
Loan consolidation can be the right way to get rid of debt. It means merging all your loans into one new loan. You can set this up with one of your existing providers, or switch to a completely different one. A clear advantage of consolidation is that you save on fees. Managing one loan is financially less costly than managing several. At the same time, you won’t have several debts on your mind, you’ll focus on just the one and do your utmost to pay it off.
Always sign a loan agreement only with a provider verified by the Czech National Bank (ČNB), which keeps a register of all licensed consumer credit intermediaries. Don’t be tempted by adverts for loans without a credit check or loans without proof of income. These loans look attractive at first glance, but the opposite is true. Only sign an agreement with vetted providers. When choosing, follow a few rules on how to pick the most favourable loan.
