From working through this post, you will learn how to clear debt quickly by changing your thinking and laying the foundation of sound preparation. Once you’ve finished reading you will be ready to tackle the practical actions leading to paying off your debt fast.
What was the first thing you thought to do when you decided to clear your debt quickly?
Most people feel confused and don’t know where to start. I know I felt like that.
I started by reading indiscriminately about debt. I read other people’s stories for motivation, I devoured expert analyses for knowledge and got to hear, rather boring and non-sensical at times, advice for good measure.
Here is something no one told me about paying off debt:
“To clear debt quickly, you don’t start with the practicalities; you start with committing to debt freedom, understanding of the pitfalls on the way, and comprehending the basic money rules.”
I know that you are rearing to go and make some debt payments. Don’t!
Doing some learning, analysis, preparation and, what looks like, Jedi money tricks now will shave years off your debt payment plan and give you strength when you think you can’t stay the distance.
Trust me on this one and get on with your ‘I’ll see the top of this debt mountain and come on the other side smiling’ preparations.
You already know that hunter focused commitment is the only secret to paying off all your debt in record time (and how to enforce commitment). You are also aware of the pitfalls on the way to debt freedom (and how to avoid them).
Now, let’s talk about the three things you must understand to clear debt quickly – they are important to change your mentality and, correspondingly, transform how you think about debt, build your debt payment strategy and plans, and shape the actions you take.
Don’t sell assets to clear debt quickly
When you first see your numbers (and I’ll tell you how to work out your debt numbers next week), it is very tempting to go into an ‘I want this gone now’ mode.
It is natural. I felt the same. When I heard we had £100,000 worth of debt, my brain started shouting things. Loudly. One of these things was, ‘I want this done.’ Another one was ‘F*ck. We are going to lose our house, our…everything.’
Blind panic is a natural reaction in the face of piles of debt. Panic is one of the things that, evolutionary, our big brains learn to do very well – fear and flight keep us alive when disaster strikes.
Not this time. When it comes to clearing your debt, panic is not what we are looking for; what you need are dedication, knowledge and action. Debt is like revenge – it is best served cold.
Take several deep breaths. Are you ready to listen, and think, now?
I know you want your debt gone in an instant but don’t sell assets to pay it off.
(A reminder that assets are the things you own that bring, even potentially, more income. Like a second home that you can rent out. Like investments that appreciate.)
You can sell possessions you don’t need or want like second cars – simplifying your life and discarding possessions is cathartic and practical when paying off debt.
There are three main reasons, I believe, for not selling assets to clear off debt:
- Assets may generate more income in the (near) future. Instead of selling off assets, start thinking about how to mobilise these to make you more money; use this income stream to pay off your debt fast.
- Paying off debt is an opportunity for learning. You are in debt because you don’t understand how money works, or your understanding is deficient. Living in ignorance about all matters financial is a sure way to find yourselves back in debt even if you manage to pay it off. Learning, and applying this to your life, is the only way to clear your debt and live debt-free.
- Paying off debt is an opportunity to develop good money habits. Yep. Most financial health is a matter of good habits. Paying off your debt is an opportunity to develop these habits.
Don’t become a yo-yo debt person who pays off debt, gets promptly back in debt, and pays it again. Don’t know about you but I’d rather get in and out of love than get in and out of debt.
In my experience, selling assets to pay off debt leads to yo-yo debt because it doesn’t afford opportunities to learn and work on good money habits. You see, we’d been in debt before, and we sold assets to pay it. Every time we did this, we found ourselves in debt again.
Last time we paid our debt (relatively) fast but without selling assets. Our last debt payment was in February 2013, and we have lived debt free (apart from mortgage but this is another story) since.
Understand the difference between ‘reasons’ and ‘causes’ to change your perspective and work out how to clear debt quickly
Most people don’t understand the difference between ‘reasons’ and ‘causes.’
For instance, even personal finance gurus will tell you that you are in debt because ‘you spend more than you earn.’ It is technically correct – being in debt means that when you tally up your accounts, your spending exceeds your income.
It, however, is the reason you are in debt; it is not the cause of it.
What is causing you to be in debt may be that you have a shopping addiction, you are clinically depressed and have learned to ‘cheer yourself up’ by buying stuff you don’t want, or you have not been managing your money.
You may also be surprised to discover that you are in debt, and getting even deeper in the red because you don’t earn enough to afford even a basic lifestyle.
You see, the difference is that the reasons you are in debt are answers to the question ‘how.’ How do you get in debt? Quite right that you get in debt by spending more than you earn.
Causes are answers to the question ‘why.’ Why do you overspend? Is it because you waste money or because you don’t earn enough?
To clear your debt fast and live debt-free, you need to work out its causes, not simply its reasons. For example, you may find that you don’t earn enough. Next, you must ask why you don’t earn enough?
The solution to your debt problem may be to get different or higher qualifications. Or it may be to work for a different sector. It may be that you need to improve your confidence or smarten up your appearance.
There are three stages to paying off your debt, and they are very different
Clearing debt is bumpy, but what a glorious ride it could be! It is like a roller coaster – enjoyable when you expect the ups and downs.
Apart from the natural, and to be expected, highs and lows of debt payment, you should also know about it as a process comprising three stages: stabilisation, expansion, and acceleration.
Understanding what each of these stages entails and how to move between them will help you pay off all your debt in record time.
#1. Stabilisation stage of debt payment
It is the first stage of debt payment where your tasks are to ensure (a) you’re not getting further in debt; (b) you have money left after all your bills to make debt payments reducing your debt.
(It is important to throw enough money on your debt to pay more than the interest. Credit card minimum payments are set, so they cover the interest and hardly touch the debt itself. It serves the credit providers well, but you end up a big loser.)
At the stabilisation stage of debt payment, you:
- Gather all information about your debt (we’ll work on debt mining and records next week);
- Know your monthly income and spending (this is our task for the week after next);
- Reduce your spending immediately by reducing all waste.
Please keep focused and remember that reducing spending is the fasted, albeit not the most effective, way to release money for debt payments. It took me exactly seven weeks to reduce our spending, mainly by eliminating waste and release enough money to meet the hefty monthly loan payments.
During this stage of debt clearing, your money management confidence will soar. Yes, you can pay off all your debt because now you know how much debt you have, how much you earn, and how much you spend (and what you spend on) and you released the money to make debt payments by slashing wasteful spending.
You are ready to get smarter about clearing your debt.
#2. Expansion stage of clearing debt
Now that you’ve stabilised your finances, you can focus on ways to increase your cash flow (and use it to overpay debt). It is best done by a combination of becoming a frugal artist and by increasing your income.
Moving from the ‘stabilisation’ to ‘expansion’ stage of clearing debt means that you:
- Work on your debt payment strategy and debt payment planning (yes, you need to approach this with a cool head at this stage).
- Find ways to reduce the interest you pay on your debt.
- Ensure that your cost-cutting is sustainable in the long run.
- Increase your income.
Achieving all that may sound scary or unrealistic. You may be especially concerned about your ability to make more money. I’d urge you to try – I’m yet to meet anyone who acted on the decision to increase income and failed. Do you hear what I’m saying?
Frugality is the second fiddle to increasing income and the expansion stage of debt clearing. Oh, and you need the discipline to throw most of your new earning on your debt; there are no two ways about this one.
#3. Acceleration stage of clearing your debt
Once you’ve made sure your budget is as tight as well-fitting corset (stabilisation) and that you have different income streams (expansion), you’d notice that paying off debt starts feeling like airplane landing – your debt-free date rushes towards you at neck-breaking speed.
Once you reach the halfway point – this is you have paid off half of your initial debt – the at which your debt crumples even faster because this is the point where more of your regular debt payment goes to the principal than interest. Simply put, a larger proportion of your payment goes towards paying off debt and a smaller part pays the interest charged on the debt.
It is important to know in which stage of clearing debt you are because this will frame your expectations. For example, you mustn’t get impatient at the ‘stabilisation stage’ or complacent at the ‘acceleration stage.’
To pay off your debt fast, you must go through the ‘expansion stage’ of debt payment and to the ‘acceleration stage.’ Don’t panic if you find yourself stuck at the ‘stabilisation stage’ of paying off your debt – you can still get to the ‘acceleration stage’ and pay off your debt; it will just take a very long time. A shame, really when you can do it faster.
‘This is all well and good, but I still haven’t paid off any debt.’ – I hear you grumbling.
True. What you must concede is that to work out how to clear debt quickly, you need to change the way you think about money, about debt and about the strategies to help you become debt-free.
There are three things you must understand, and act on if you want to pay off your debt fast, namely that you:
- Must refrain from selling assets to clear the debt.
- Ought to work out the causes, not only the reasons for being in debt.
- Expect the highs and lows each stage of debt payment brings.
This preparation will save you much time and pain on the way to debt freedom.
Now you know these three things; your reason has the upper hand on your emotions. You are ready to start paying off your debt and staying with it till it is all gone. Next week, we will move from learning and understanding to practical doing: I’ll help you to get to know your debt intimately.