The debt crisis can be among the most stressful of experiences one can go through, emotionally and financially. It might start as something small like skipping a few payments or having a huge debt balance with a high rate of interest that goes on for too long to the point that your minimum payments take up a very significant portion of your earnings each month. The more out of hand your debt ratio gets, the harder it becomes to make any decisions financially, which may affect your work and even your sanity.
Nevertheless, being in a debt crisis does not spell disaster as there are ways out and all you need to do is formulate the plan and stick to it strategically.
1. Stop the Bleeding Immediately
Prior to paying down existing balances, it is necessary to stop accruing new debt:
Stop Using Credit: Remove credit cards from your wallet and delete saved payment methods from online retailers to avoid unnecessary spending.
Track Your Expenses: Check the previous 3 months' bank statements for subscriptions, meals out, and any non-essential expenses which can be cut back temporarily.
Create Micro-Emergency Fund: Establish a small emergency fund ($500-$1,000) to cover any unforeseen expenses, so that you do not have to use credit during your repayment process.
2. Select a Debt Repayment Strategy
Choose a strategy to repay your balances efficiently:
Debt Avalanche Strategy: Send additional payments to the highest APR account while making minimum payments on the rest. You will mathematically minimize the amount paid in interest this way.
Debt Snowball Strategy: Repay balances by focusing on the smallest balance account first (regardless of APR). This will give you instant wins and a morale boost.
Balance Transfer: Consolidate all high-interest debts in one lower interest rate personal loan or 0% APR balance transfer credit card.
3. Restructuring and Negotiation of Terms
Do not assume that your debt terms are set in stone:
Reach Out to Creditors: Request interest rate reduction, fee waiver, or hardship programs. Often times, creditors can give you reduced interest rates temporarily as long as you show a positive payoff strategy.
Prioritize Risky Debts: Prioritize secured debt (such as your mortgage and car payment) and utility bills over unsecured debt (credit cards, personal loans, etc).
4. Seek Advice from Someone Who’s Been There Before
Recovering from debt usually requires not only mental pressure but also career and strategic challenges. While a calculator will help you crunch the numbers, it takes actual human experience to make a judgment call.
If you’re feeling stuck and unsure what your next career or financial step should be, turn to mentors that have gone through the same and won. PingMentor will allow you to anonymously get advice from successful individuals based on real-life experience.
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