Personal Finance

Painful steps you must take to manage small and huge debts

You can free yourself from debt shackles. FILE
You can free yourself from debt shackles. FILE PHOTO | NMG 

Everyone with even a little bit of debt has to manage it well. If you have a little debt, you have to keep up your payments and make sure it doesn’t get out of control. On the other hand, when you have a large one, you have to put more effort in repaying while juggling payments on the debts you’re not currently paying.

Carrying large amounts of high-interest debt hurts your ability to save or invest and meet other needs. Keeping debt in check and ensuring that your credit score stays solid makes many things easier, including getting a job or a loan. Reducing debts is the most common financial New Year’s resolution because financial issues are the leading cause of stress for Kenyans, and debt can be one of the biggest causes of high divorce rate in Kenya.

But out-of-control debt doesn’t have to control your finances. Debt hurts your financial security in two ways. It’s obvious that it slows down your accumulation of wealth for retirement. But what may not be as easy to see is that by building up debt, you get used to an inflated lifestyle — and that makes it even harder to change your behaviour when you commit to paying it off and living within your means.

Though your debts might feel bigger than you, they’re not. You have the power to reduce your debts down to size and manage them more effectively. Here are some steps:

1. Know who and how much you owe

Make a list of the creditor, debt figure, monthly payment, and due date. You can use your credit report to confirm the debts on your list. Having all the debts in front of you will allow you to see the bigger picture and stay aware of your complete debt picture. Don't just create your list and forget about it. Refer to your debt list periodically, especially as you pay bills. Update your list every few months as the amount of your debt changes.

2. Start small and stay steady

If you can’t afford to pay anything more, at least make the minimum payment. Getting control of your debt is a wise move to make, but don’t feel like you need to take all of these actions at once. Getting out of debt is a marathon, not a sprint. Just start with one strategy, and take one step at a time.

3. Pay bills on time

Late and missed payments show up on your credit report and can seriously harm your credit score. Automate your payments to ensure you never miss any. If you have multiple credit cards, stop using most of them and rely on the one or two that have the best terms. You can consider closing accounts that carry an annual fee, but keep in mind that the older a credit line is, the more it strengthens your credit score.

4. Take advantage of a 0% balance transfer

In addition to consolidating credit card debt, a balance transfer is also an option. This means you use a credit card with a lower interest rate to pay off others with higher rates. Doing this can get your credit card debt on a lower-interest card, so you’re paying less each month.

5. Earn extra money for extra debt payments

The bottom line of debt is that to get ahead, you’re going to have to pay more than the minimum each month. But to pay extra money, you’ll need extra money in your budget. Or, you can choose a side job to earn more cash to put toward paying down debts. Whatever your skill set or time limits, if you think creatively, you can identify a money-generating opportunity to match. Then put this new cash flow toward your debt and watch your balances drop even faster.

6. Use monthly budget to plan expenses

Ensure you have enough money to cover your monthly expenses. Plan in advance and you can take early action if it looks like you won't have enough money for your bills this month or next. A budget also helps you plan to spend any extra money you have left after expenses are covered. You can use this extra money to pay off debt faster.

7. Look into refinancing or consolidation.

If you still feel like you need more control over your debts, consider restructuring them altogether. Refinancing or consolidating your debts gives you more control to choose how you repay them. It gives you options like resetting monthly payments or changing how many years you’ll be repaying.

Moreover aim to pay off debt using incoming cash flow, not savings. It may feel like a struggle, but if you pull money out of savings to pay off things like your credit card you run a high risk of pushing credit card balances up again. This will hurt savings goals.

If you find yourself worrying about finances, take additional steps to safeguard your future.