Debt is something loads of people have and eliminating it is something most of them struggle with. We live in an age where the media easily convinces us of the things we need. Often, we fall for these things – including me. Find out how to remove debt and follow the 7 simple steps below.
Where does this problem stem from? After having spoken to a number of individuals who are struggling with debt, there was one common denominator… education. Well, the lack of it. The problem is that many of us don’t have any education to do with money. Many people believe: you get money… you buy stuff with it… if you don’t have enough right now… you get a credit card and pay for it all later! Sounds simple right? Wrong! This is a recipe for disaster and debt will start to slowly accumulate and before you know it you’ll be so far down the rabbit hole you won’t know where to turn!
The second issue is that we are not really taught how to make the money we do have grow in to more money. I know I was taught to save for the things I wanted to buy; I had my first job at 13 and knew the value of money because I worked for it. Did this mean I was good with money? No! It just meant I was good at putting money aside for the things I wanted to buy. I would always end up with zero at the end!
Unfortunately, we live in a time where very few people have money saved, in fact I’d say that more people have debt than savings!
The different types of debt
Not all debt is created equal, in-fact some debt is fantastic! However, spending money on wants you can’t afford isn’t. Paying for wants monthly because of an inability to save isn’t. If you can’t afford it, don’t buy it. Different companies have made it really easy to pay for things you can’t afford. Can’t afford that Apple laptop? The staff at Apple are more than happy to tell you about their finance option. Why not take out a credit card? You can pay it back monthly. These credit card companies know that most people are bad with money and will likely buy more than they can afford. Thus, paying high interest fees because they can’t pay their bills on time. Don’t get your goods repossessed, they’ll become bads… #DadJoke
OK / Acceptable debt
Some debt is not that bad. Student loans in the UK are around 1.1%, which isn’t that bad and gets fully written off after approximately 25 years of paying. Earning around £40,000 a year with a debt of £30,000 and interest of 1.1%, you would probably pay off your student loan in around 16 years and pay less than £5,000 interest. If you are on a lower income for the 25 years, the loan will be wiped, and you will be debt free. If you know you will earn more and the idea of paying around £5,000 in interest over 16 years makes you feel sick, you can pay it off early.
Good debt offers you a lot of benefit with low interest payments. For example, buying a house. A mortgage is a brilliant example of good debt. You get something that goes up in value over time and which you pay back monthly as well as having somewhere to live. Often interest payments are really low, ours has been around 1.9% for the last 2 years. Why not pay off that mortgage early or pay off other debts by renting out some of your rooms? Or use that additional money to do your loft or extend to add additional tenants and value? You could even use that extra money to buy another house and rent out all the rooms? I love me some good debt!
How to say bye, bye to bad debt for good – 7 steps to remove debt!
Many people will give you bad advice about managing your debt. Some will tell you to use one credit card with free transfers to pay off other credit cards! What the hell kind of advice is that? Only use this if they give you an interest free period, but don’t live this way! That’s how you continue holding onto your debt, we need to kiss it bye, bye!
Don't spend money you don't have!
- This may sound simple, but it is something that so many people struggle with, even me in my younger years. If you can’t afford something, don’t buy it on finance! Patience is a virtue. Often with patience we find that that thing we wanted, wasn’t really that important in the first place and we change our minds. Do not impulse buy; that temporary feeling of joy can soon turn into dread when you see that money leaving your account every month and that shiny toy feeling disappears!
Use 20% of your income to pay off debt
2. As stated in ‘The Richest Man in Babylon’ use 20% of your overall wage to pay off your debt. If you do this, slowly but surely you will be able to decrease the amount of money owed. As well as putting aside 20% of your overall wage to remove debt, you should also be saving a minimum of 10% of your overall wage. This is a mandatory saving for your future! Even if your income is incredibly low, you should save this regardless. For example, on joint parental leave when I was off work to look after the little one, my first month I received £500 from work, I saved £50. I was unhappy I couldn’t save more but it was something I’d have to deal with. I’d like to point out though, that this was made possible by living with a partner. It is important that you pay yourself this money, so when you are out of debt you can use it to start investing to make more money!
The 70% that remains should be used to pay your bills and living expenses. Obviously if your income is quite high that 20% will go further, but if you have lots of money left over, the recommendation would be to pay off more and increase savings; the ratio is up to you.
Identify the highest interest payment
3. Identify which debt has the highest interest payment. If you are struggling with the payments as the sum is really high, it might be a good idea to get in contact with the lender and ask them to lower the interest rate for a period of time – you might have to tell them about your hard times. This may not work but the worst that can happen is they say no. Knowing which of your debts has the highest interest payment is important, as this is the debt we will pay down first! You shouldn’t try to pay off the smallest first for that feeling of accomplishment. Pay the one that costs the most to keep over time.
For example – let’s say you have two debts:
1.) This debt is £3,000 with an interest rate of 19.7% a year
2.) This debt is £800 with an interest rate of 9.5% a year
Debt 1 will cost you £591 a year in interest and debt 2 will cost you £76 a year in interest. It seems obvious that the one that is making your purse lighter is the one we want to eliminate first. So that’s exactly what you do – focus on paying off the debt with the highest interest rate first and tackle the rest later.
IMPORTANT NOTE: Although the aim is to pay off the debt with the highest interest first, you must make sure that you pay off the minimum mandatory payment on all of them.
Earn more money
4. If your debts are getting paid off too slowly, the next step would be to seek to earn more money each month. If you manage to gain more money each month then you will be one step closer to removing that debt forever. For tips on how to make some extra cash on the side, check out our side hustles and ways to save for a house to help you. It is likely that these ideas will take you some time to set up and might be quite slow at first. You may even feel they are not applicable to you. If this is the case, consider a part time job if time permits. This is a fantastic opportunity to potentially learn new skills in a different area, meet new people and network. This additional income will be really useful to help you achieve your goals in a much shorter time frame. You may even find that you like the job so much, that when the debt is paid off you continue this to earn more money to save and invest.
I am a teacher, but I enjoy photography. I could apply to work in a studio at the weekends having some skill. My pay might not be fantastic, but it is also a fantastic opportunity for me to learn. After working here for some time and learning the ropes, I could perhaps start doing the same job for myself, earning more than I would have for working for someone else. If it is something you enjoy more and there is likelihood you would earn more than in your current job, congratulations, you have just created your own business (you’re an entrepreneur), soon people will be asking you for a job!
Decrease/remove direct debts
5. Decrease/remove direct debits. There are wants and needs, we need to eliminate some of the unnecessary wants in order to use that money to pay off our debts. These could be removing your expensive TV subscription and moving to Netflix or Prime Video. Don’t pay for protection on all your goods, most of the time this is a waste of money and ends up costing more in cover than the value of the item. If you are paying for a car monthly, you probably shouldn’t be. There is so much obsession about brand new cars, check out the video below to find out why they are such a bad idea! You want to hold on to your money, not throw it away in interest for one of the highest depreciating liabilities.
It would also be a good idea to change your utility bills and insurances yearly using a comparison site for the best deals! Don’t pay more due to laziness. Also, if you have money saved, it would be a good idea to pay for yearly subscriptions like car insurance in one go. You will normally be charged interest to pay it monthly.
Track your expenses
6. Track your expenses and make a budget. Subscribe to our blog and get the FREE End-Rich Finance Tracker to see where all your money is going. This is a fantastic way to make sure you can hold onto the most money possible. Once you have figured out how much money you need to spend each month, you should create yourself a budget to make sure you don’t go over that amount. This is a brilliant way to keep your money safe and keep you accountable. You want to try and live below your means to remove that debt and increase that wealth.
Pay for things in cash!
7. You’ll soon stop spending when you see and feel your purse getting lighter! This is a tip that I used to get out of debt myself and a rule my father-in-law lives by. I hate handing over money, but I seem to mind a lot less when I’m using a magic piece of plastic. You also get held accountable, because if the money you have taken out runs out, you’ve got no money left. This method will soon have you counting pennies and putting them aside.
- No man/woman is an island. Ask a family member for help if you need it. If you have a family member or friend that has some spare cash in their savings, why not ask them if they’d be willing to help you with your debt? If they paid it off, you could pay them back monthly, allowing you to avoid interest fees and they would feel really good about themselves. Tip – don’t be a scumbag, actually pay them back, it’s not good to lie to people and take advantage of them; don’t burn your bridges.
- If you have seen the other posts about investing (4 areas to invest), these should be avoided until this bad debt has been removed; not including investing in yourself as building new skills can help you to earn more money in the long run.
- Sell unwanted goods on eBay, Gumtree, Facebook etc. This is a great way to make additional cash. I did this myself with old phones and electronics I wasn’t using anymore.
- Participate in activities that are either cheap or free. Going out to museums or going to the cinema with a 2-4-1 pass. Little things that mean you can still have fun and spend less money doing it.
That warm fuzzy feeling
Once you’ve managed to remove debt from the picture and have been saving the 10% a month every month, you should have managed to build up a nice little buffer/emergency fund. This is for any issues that might arise that you need to pay for. The amount in your buffer is up to you, but I like to have enough to not need to rely on a credit card.
That warm fuzzy feeling comes when you see your bank account or investments going up or increasing in value. That feeling is addictive and very few things give me as much satisfaction as this! I often see if I can be even more frugal in the month to see if I can put away any extra money! Think about your goals. Ours at End-Rich.com are to save and invest for our daughter’s future and give her the best start we possibly can.
I’ve had some spectacular money blunders in the building of my financial education! Many people have… if you have too, hopefully it showed you what not to do and gave you steps to move forward in the right direction. Let’s have a quick recap:
- If you don’t have the money, you probably shouldn’t be spending it!
- An overdraft and credit cards are not free money, they just delay payments and cost you interest over time.
- Try especially hard to change your mindset and decrease your unnecessary spends on wants. However, if you did spend that money, sell all the unnecessary stuff to make some cash back.
- If your debt is high or you just want to increase your savings, try to make additional money through either side hustles or part-time work.
- Track your spending with our FREE End-Rich Finance Tracker!
- It will be practically impossible to survive on 70% of your wage (10% savings and 20% for debts) if you are paying out loads of money each month on your direct debits! Think carefully about your needs and wants, then decrease/remove any unnecessary direct debits. In the UK you get Freeview, so cancel your tv subscriptions. Why spend £40+ on Sky TV when you can have Freeview for free? For a list of direct debits to remove, look at the post, saving for a house if you didn’t check it out earlier.
- Lastly, take out all the money you will need for the week and try to pay for everything in cash. When you see how much money you’re spending you will soon slow it down and spend more sensibly.
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