From overdrafts to personal loans and credit card borrowing, the amount of debt, and the number of people in debt, has grown noticeably within the past year1. However, dealing with your debt can be overwhelming. Many people prefer to ignore the reality of their debt than deal with it. Others simply don’t know how to cope with clearing their debt when they are already in dire financial situations.
Nonetheless, it is important to act swiftly and decisively in the face of mounting debt. Rather than prolonging your stress, end your debt-related worries and live more freely knowing that you have paid off your loans.
Budgeting is key to good financial health. Make a weekly and/or monthly plan for your spending after paying for your fixed expenses and necessities from your income. If your total expenses exceed your income, then perhaps it is worth looking at lifestyle changes to align your spending within your means. While it may be difficult to make sacrifices, you gain more in peace of mind when you no longer have debt looming over you.
This step is crucial, especially if you have multiple debts. Rank your debts in order of interest rates and/or amount due. Having an ordered list will help you prioritise which debts you should clear first. This will also serve as an opportunity for you to understand your financial situation and strengthen your resolve when it comes to taking action.
Paying off debts requires motivation, as you set aside some of your present wants in order to focus on improving your financial health. In this case, motivation can come in the form of a clear timeline with which you can achieve a debt-free state.
If you factor in how much money you can set aside per month to pay off your debts, you can roughly calculate how long it will take to finish clearing your debt. Once a timeline is established, you will have a distinct light-at-the-end-of-the-tunnel moment to get you through the debt-clearing phase of your life.
You don’t need to pay your loans off just once a month. In addition to paying more than the minimum amount where possible, use extra funds gained from bonuses or monetary gifts like ang paos to clear off your debt too. Paying more frequently will allow you to speed up the timeline of clearing your debt, so try your best to contribute to these payments as often as you can.
Setting aside money to clear your debt can feel difficult, especially if you think it can help pay for something you need now. In these moments, remind yourself that the faster you clear your debt, the quicker you’ll be able to enjoy a debt-free life.
If you have multiple debts that you are struggling to tackle, then the next two methods are worth trying out.
There are two ways you can tackle your debt; the “snowball” and the “avalanche” method. The difference between each method ultimately boils down to what your priorities are regarding your debt. If you feel overwhelmed by your debt, then the snowball method is likely for you. On the other hand, the avalanche method is worth a try if your concern is the high-interest payments on your loan.
The snowball method begins with clearing your smallest loans off first. In addition to paying the minimum amount on each debt, extra funds are allocated to paying off your smallest debt. When it has been cleared, you shift the money spent on clearing the original debt towards the next smallest amount owed. This process continues whereby each contribution grows in size to eventually tackle your largest loan.
The clearing of each account gives the debtor motivation and encouragement to continue paying off their loans, as it can be highly satisfying to see the list of debts getting progressively shorter.
In contrast, you have the avalanche method that deals with paying off the loans with the highest interest first. Following the same logic of paying minimum amounts for all debts, the debtor contributes extra to the highest interest loan and reallocates funds as each debt is cleared.
It may take longer for you to see progress given that you’re starting at the top of your debt pyramid. However, this method will save you money on interest paid in the long run.
We understand that clearing your debt can be a daunting task. No matter where you are in your journey to become debt-free, we at SG Alliance are here to share our advice – whether you are looking to protect your family from your debt should something happen to you, or if you would like to build your wealth by clearing your debt. Simply reach out to us to explore personalised pathways to helping you achieve your wealth-building goals.
