The 7 most important commandments to avoid and get rid of drowning in debt
Tips to avoid drowning in debt
Debt is one of the most burdensome matters on a person’s shoulders, hindering him from living his life in stability due to the anxiety it causes in addition to feeling anxious and losing his freedom to spend.
The debts may be individual only, meaning that they relate to you as a person, or they will be family debts in the sense that their effects will extend to the destruction of the whole family’s life, and this is the result of bad and wrong financial habits and behaviors. In this case, the burden of debt is more psychological on the person because it causes him to feel guilty for causing the deterioration of the family financial situation.
Debt not only constitutes a financial burden that must be paid, but it also deprives us of enjoying our monthly income and spending it comfortably, it also deprives us of the possibility of saving or investing, and most importantly, it deprives us of financial stability.
The methods and methods that people use to get rid of their debts differ, depending on the nature and size of that debt. Because of the sheer amount of debt they are suffering from, some may think that getting rid of debt is nearly impossible. But here are the best tips for avoiding and getting rid of debt in order to achieve financial stability.
The most important 7 commandments and tips to avoid and get rid of drowning in debt
1- Develop a strategy for religion
Where you must restructure your finances to get rid of debt forever. Determine both the basic and the luxury expenses that you spend. You have to eliminate luxury expenses, and cut back on spending on basic goods.
Basic commodities are defined as commodities that are never indispensable and cannot be lived without, such as water, electricity, telephone, food, education, etc. As for luxury goods, they are like clothes or excessive diversification by buying clothes, visits to restaurants, trips, etc.
When you divide the expenses and adjust the amount of spending, you will have what is called a financial surplus, which will contribute greatly to restoring your financial position to its previous state by paying off debts.
2- Be decisive and decisive when making the financial decision
You have to turn away from an emotional financial decision and always try to make decisions rationally.
If your consumption increases in luxury goods, your decision is emotional, but if you focus on reducing spending on luxury goods, the decision is rational.
3- Collect the loans that were borrowed from multiple companies, and put them into one company with one loan
There is a so-called consolidated loan, which is what people with more than one loan burden resort to, as this is a good strategy. But it must be implemented in a conscious and cautious manner, because it leads to extending loan repayment periods and thus increases the interest rate accumulated on it.
This process is done by first collecting all debts into one debt, and then extending it. This is called debt rescheduling, meaning collecting a car loan, a home or something else, and collecting it in a so-called “pooled loan” and then you start the repayment process.
The goal of a syndicated loan is to reduce the amount of the installment that must be paid off. And here lies the negative aspect of it, that is, it reduces the payment installments but extends the payment period or the repayment period, and thus you will have benefits for future years.
The best way to get rid of this downside is to exploit the difference between the two installments in the case of sporadic loans and a single loan.
Meaning, you must collect loans with one combined loan, and at that time the value of the installment that must be paid each month will be reduced compared to the total installments that should have been paid in the case of non-consolidated loans. We calculate the difference between the amount of the two installments and then use this amount in the investment.
Let’s take an example:
We have 5 loans, each loan that entails paying a monthly installment of $ 1,000, in this case the sum of the installments will be $ 5,000 per month.
We exchange these five loans for one syndicated loan, which has a monthly installment of $ 3,000 per month.
In this case, we have $ 2,000 that can be assumed or taken as a surplus, which is 5,000 (five loan installments) – 3,000 (pooled loan installment).
What we must do in this case in order to avoid the negative side of the combined loan, i.e. increase the amount that will be paid on interest, is to invest this amount that we have reduced from the total amount that is paid. And as you know, in this case, this amount will double later, and make us able to pay more amounts than the loan value.
4- Reducing the number of loan installments for the maximum possible period
When the loan repayment period is prolonged, the amounts to be paid will increase in interest, which can be considered an additional debt that can be reduced.
Consequently, if you have to borrow, and the repayment period imposed by the bank is 3 years, for example, try to pay it back in a shorter period.
5- Determine the priority between investing and getting rid of debt
If you suddenly got a certain amount of money, it could be its source, for example, a certain legacy, or the sale of your car, or you get a reward at work or otherwise, in this case you will have two possibilities to either pay this amount and get rid of the debt, or invest this amount And continue to pay the debt payments in installments.
The appropriate decision in this case is based on simple calculations, which we will explain in this example:
If the return on investment is 8% while the interest rate was 3% (the return on investment is greater than the interest rate), then it is certain that the most appropriate decision here is the direction to invest.
But if the return on investment is 1% while the interest rate was 3% (the return on investment is smaller than the interest rate), then it is certain that the most appropriate decision here is the direction to repay the amount of the debt.
6- Pay with cash, not credit cards
A credit card makes paying any amount easier. While you can limit spending by allocating a certain amount that you consume during a week or a month, for example, do not put more of it in your wallet that helps you reduce your spending. Here you will feel the amount of money you spend each day, compared to a credit card that will not realize the size of the whole amount until the end of each month.
7- Establishing an annual spending plan
You should create an annual spending plan and split it up over 12 months. This plan will help you to use the surplus that could exist in some months to get rid of the deficit that you may suffer from in other months.
It also helps you get to know more about the nature of your spending, where the spending problems and the potential for debt are.
Finally, we got to know the most important and best tips to avoid drowning in debt and get rid of it to reach financial stability.
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