Having a debt can be overwhelming for many of us; Sometimes we can think that we can never get out of this bottomless barrel. However, there are strategies to get out of this problem, the most important thing is to start planning it right now. The faster the debt begins to decrease, the lower the cost of doing it and the faster financial freedom will take place. In the end, our income should serve to build wealth, not to pay interest. In Finerio we suggest you three steps to start your journey:
Sometimes, we are worried about starting to visualize our current situation with regard to debts, simply because visualizing the realization can be painful. However, having an overview of our debt will allow us to choose the best way to reduce it. Then, you must list all the debts that are held in the present (with the exception of the mortgage), no matter the amount or the interest rate paid for them.
Since we have a general picture of the debt, the next step is to try to renegotiate the debts with high interest rate with the institutions with which they contracted. Although this can be difficult with banks, there is a possibility that they have a new credit product that is more favorable or consolidate all the debts in which they have the lowest interest rate. You can also look for other credit institutions that can offer lower interest rates. It is only necessary to see that the opening cost and the penalties for paying the debt in advance (if they exist) are lower than the benefits obtained by the reduction of the interest rate.
In turn, different levels of government and many lending institutions have programs to eliminate accumulated moratorium commissions so that people get up to date on their payments and even eliminate debt if certain requirements are met. For example, Banco de México has a Fund for the Development of Human Resources (FIDERH) to finance postgraduate studies. If at the end of the postgraduate course work of teaching or research is carried out, the debt can be canceled.
Subsequently, a strategy must be created that will allow the payment of debts in advance with time objectives: the faster we want to pay our debt, the greater the resources we will need to do so. There are two main methodologies:
a) “Snowball”: Dave Ramsey, the guru of personal finance in the United States, popularized the strategy that consists of organizing the debt from the lowest to the highest amount to be paid as shown in the example:
Efforts are then focused on paying in advance the debt of lesser value, in this case it would be the family loan and paying the minimum on the others. Once this loan has been paid in full, the money that was used to pay the first loan is focused on paying the second loan with the lowest value, in this case television . This process continues until all the debts are paid in advance. The advantage of this strategy is that it allows you to palpate achievements instantaneously and thus motivate yourself to continue with the strategy
b) “Avalancha”: the avalanche strategy consists in prioritizing the efforts in paying the debt in advance that has a higher interest rate, in this case the Automobile, and paying the minimum in the others. Since this debt is paid, focus efforts on the debt with the second highest interest rate, in this case the Family Loan and so on. Although this strategy may not have tangible results in the short term, in the long term the cost of the debt is lower since the debts with the highest rate are paid first.
For both strategies, you need to generate monthly savings that allow you to prepay the debt. The easiest way to generate these savings is by creating and following up on a budget, which can show savings opportunities. It should be mentioned that savings opportunities do not necessarily have to affect our lifestyle. For example, if we spend $ 70 every day on a coffee from some prestigious chain, we can invest in a $ 600 coffee machine and reduce spending to $ 10 per day. In 10 days we would be recovering our investment and we could start saving. However, if the debt is very large, it could require significant sacrifices such as selling the car where you have one of the debts.
There are some final recommendations:
• It is advisable to focus on paying debt first on savings except for a contingency saving in case there is an unforeseen
• You should try to acquire the least amount of credit in this time, since debt payment goals can be delayed or even never achieved
• The savings generated should be channeled directly to the payment of debt and not for other expenses It is advisable to do it at least every week to avoid forgetting
• Discipline and commitment are the most important in this process.