Getting into a debt trap is quite easy but getting out of it is not so much. Amidst mortgages, student loans, car loans, medical bills and credit cards, it is quite easy to fall into a debt trap. At times, one doesn’t even realise that they are getting caught up in the trap.
The debt trap could either be due to a loss of job, overspending or some expenses that were totally unexpected. With a few simple techniques, you can do your bit to reduce or even eliminate debt. There are no quick ways, and it would need some effort on your end. However, the end result is worth putting in the effort.
- Avoid New Debts:
Though putting a hold on debts will not eliminate your debts but will definitely ensure that you are not adding any more debts than there already are. It might be difficult but keep your credit cards aside and stay away from the temptation to use them.
This might also be a good time to start with a budget if you do not already have one. Creating a budget will help you restrict your spending to your income or less than that. Once you get into a habit, you would no longer need credit cards or loans to take care of your debts.
- Snowball Method:
When you pay less amount towards your debt, the interest on it keeps accumulating and constantly makes it bigger. And eventually makes it difficult for you to get rid of them. Snowballing is a technique used to reduce your eliminate debt and is one of the most popular methods as well.
When you snowball, you pick the smallest debt and make as much payment towards it as you can every month. This will help you see noticeable progress in reducing the debt as well. All the while, you must continue making the minimum required payment on all the other debts.
Once you pay off the smallest debt, you can repeat the process all over again with the next smallest debt. Continue with the snowballing method, until you eliminate all of your debts. The closure of debt will help your confidence levels immensely as well.
- Emergency Fund:
It might seem a bit contradictory to build an emergency fund when you are trying to get rid of debt, but it does make sense. You must put in efforts every month to put aside a small amount towards an emergency fund. The sole purpose of this fund is to act as a safety net if the situation arises.
And in the case of an emergency, you can rely on this fund, rather than using your credit card or taking another small loan. In an ideal scenario, your emergency fund should be 6 to 12 months of your living expenses. But you can start with a smaller amount.
Following the above methods will help you cut down on your debts by a considerable margin and even get rid of them.
