Personal Finance

10 simple steps to get you out of deep debt.

How to get out of debt

Conventional advice maintains that you should get out of debt, yet proper leverage can propel you to unprecedented financial prosperity.

Saving is a basic requirement for financial independence, yet it can take you only so far. For example, saving Ksh10,000 will accord you a millionaire status in Kenya shillings over 8 years. To be a millionaire in dollar terms you require over 800 years, whoosh!

This is why you need leverage. Leverage in finance refers to using available resources to magnify your financial returns disproportionately to existing norms. For example, in the transport business, using a cargo plane to transport goods is leverage as compared to using tracks.

Leverage can be in terms of using computers, employing more labor to complete tasks faster, using faster transportation or using financial instruments such as debt and multipliers such compound interest.

Leverage is mostly employed in FX trading, Real estate, commodity trading, derivatives, etc. In these businesses, leverage magnifies the returns as well as the losses. It can be viewed as a saw that cuts both forwards and backward. Leverage should be used very cautiously.

Since debt is a form of leverage, it can propel you forward financial but it can also be your most painful headache. Therefore, we referred to debt that benefits you as good debt while debt that sets you backward as bad debt.

Good debt

Someone else pays for you and then it makes you rich. For example, when you take out debt to buy a piece of real estate where the rentals you collect are more than the repayments to the bank, this is good debt because it is putting money in your pocket.

Bad debt

These are debts that get money out of your pocket into someone else’s. For example, buying a car for personal use, buying a house to live in, buying jewelry to bling. All these benefit the recipient of the cash flow.

Indeed, in determining bad or good debt, the focus should be, who is receiving the net cash flow, you or someone else.

In today’s blog, we discuss how to manage your debt once it goes out of hand and threaten to sink you financially.

  1. Accept, don’t pretend and accept the truth.

Debt is psychological, there is a huge stigma around having debts and most people would rather bury their heads in the sand and continue living as if nothing is amiss. Yet, debt has a characteristic to accelerate to the negative once you start missing repayments and very soon it gets out of hand.

Step one to solving debt issue is to accept that you are in debt and seek solutions. The steps below will work only once you have mentally accepted that you have a problem.

  1. Make a list of all the debt that you owe

Step three is to make a complete comprehensive list of all the debts that you owe. These include bankers, microlenders, friend and family. List all of them and how much you owe them.

  1. Hire a bookkeeper.

We have discussed that debt is psychological. Human beings naturally don’t like reviewing or looking at negative information. If your finances are out of order, you will not want to look at them continuously. If you look at them, you will be biased and emotional. This is why you need a bookkeeper.

The bookkeeper will help keep accurate records as regards to what you are earning and what you are paying out.

This person will help you arrange your finances and help you see loopholes and opportunities in your finances that would have been difficult for you to notice.

Luckily, you don’t have to pay expensively for services of a bookkeeper, at only Ksh 200 or USD2 per month, you can now get Bwana Pesa to organize your finances.

  1. Visual representation of the debt.

In step three you recorded all the debts that you owe. Now you need to visually represent.

Besides each debt amount, list down the minimum monthly requirement.

Calculate how long each debt will take to pay at the minimum requirement. That is how many months it will take to close each debt. You can use visual aids like stickers and graphs to help you visualize.

  1. Determine the order of the repayment starting from the smallest to the largest

Now that you have the number of months it will take to repay each debt, determine which one you can pay first. You can start with the smallest one with the highest interest.

Attack it will all your might and psych.

  1. Come up with an extra Ksh 10,000 each month,

The Swahili say, dawa ya deni ni kulipa (literally, the medicine of debt is to repay). All these beautiful graphics will not repay the debt. You need real money to repay debt.

It has been shown that by coming up with an extra Ksh10,000 to Ksh 20,000 you should be able to comfortably start paying your debts. Sell anything to make Ksh 10,000 a month.

  1. Pay the minimum due on all the debts

Once you have selected the one debt to kill, pay minimum due on all other loans. Remember that the amount of money that you need is equal to the minimum on all loans and the amount to repay the loan that you have targeted.

  1. Try not to go back into more debt

In life, if you injure yourself and start bleeding, the first thing to do is block the wound from bleeding more because by continuing to bleed, it will lead to your death.

This analogy is so true for debt. Once you have accumulated excess bad debt and you want out, you must use all your efforts to stop acquiring more debt. This involves

  1. Start leaving frugally at least for the time you are in serious debt
  2. Stop continuing to pile your credit card debt,
  3. Do not turn to alcohol, sex and use of drugs to solve this problem.

If credit cards are your weakness, cut them up!

  1. Invest money

When in debt, your financial development is usually halted and you are unable to progress. Your life gets to a standstill and your friends and family desert you. This is the time you need to summon your internal power. This is the time your courage is paramount.

This is the time that you need maximum discipline and dedication. The road to financial independence is paved with rough-edged stones that cut through the soles of your shoes and injure your feet, making you feel like stopping.

However, continue to invest even when in debt, even if it is investing in your personal skills and competencies such as money management and honing your marketing skills.

  1. Go through the process with partner

This is perhaps the most underrated of the steps, yet it is the most stabilizing. By having someone to talk to, someone who understands and does not judge, you get a shoulder to lean on when creditors are giving you sleepless nights.

Think of a partner as a pillar you can lean on, run to and share your thoughts through the most difficult of moments.

The biggest advice is to Invest in good debt and avoid finding yourself on the wrong side of creditors. However, if it happens and you are deep in debt, then the above steps should be your anchor.

One thought on “10 simple steps to get you out of deep debt.

  1. Modestar Wiyema says:

    Very good and practical article on Debt Management.Thank you

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