Financial freedom does not come easy especially if you are entangled in personal and business debts that you have to pay off every month from your seemingly meagre monthly incomes. There is always the looming threat of being blacklisted by the credit scoring companies if you default in making your debt repayments. This pushes most of us tend to work hard every month just to ensure that our monthly instalments are well met and maintain a good credit score in order to increase our chances of getting more loans in the future. This life of surviving on borrowed money is however leads us into a cash trap that enslaves us to our lenders and denies us the freedom to plan for our lives beyond debt repayments.
Everyone wants to be free, but freedom always come at a cost and it must be accompanied with responsibility too once it has been earned. Getting or regaining your financial freedom is not any different either; you will need to sacrifice in the short term for the sake of long term happiness when you can freely choose what to do with your money without prioritizing your lender. Planning how to get out of debt and putting the right measures in place is the first step to financial freedom, but it is all futile if you do not implement the plan and be disciplined enough to stick with it.
Analyze your debt levels
To solve any problem you must first have a full understanding of the root causes of the problem and identify how they are interlinked with each other before you can start finding a solution. You need to have a clear understanding of which types of debts you have currently and who they are owed to. You need also to have a clear understanding of the terms and conditions for each type of loan you have and the implications if you default on repayment. Different types of loans will also have different repayment structures and varying flexibility in terms of how easy it is to renegotiate the interest rates as economic conditions keep changing.
The first step in analyzing your debt involves listing them all from your personal loans such as credit card loans, car loans and mortgages; to business loans such as working capital loans and asset financing loans. After listing all your loans you need to rank them in order of their size and identify the terms for each loan including their interest rates. Classification of your outstanding loans into two separate groups of personal loans and business loans will also help in determining the source cash to repay the loans. Once the classification is done, you then move on to finding the remaining repayment period for each of your outstanding loans and the total amount due; inclusive of the principal repayment and interest charges.
Debt settlement plan
The above steps will guide you into having a very clear visibility into your debt level and how much you owe all your lenders and for how long you will remain enslaved to them into the future. For most people the picture is in most cases an ugly one and the need to get out of the rat race is always an urgent one. The plan to get out of debt therefore becomes a necessity in order to rectify the already messy financial trap that you found yourself in.
Now that you understand all your debts, you need to start by settling the most urgent ones and those that require high monthly instalments. This is to help you avoid being blacklisted by the credit bureaus due to default of your loans that need urgent repayment; as well as help you to get rid of the loans sucking most of your monthly income in repayments.
For the other loans that are not urgent and do not have high monthly repayment instalments, you give them second priority. However, to further minimize your cash outflows per month in order to remain afloat and start building your savings reserves, you can renegotiate the repayment terms with your bank in order to extend the repayment period and reduce your monthly installments. This may however result to a higher interest rate than originally agreed in the loan contract for the increased risk to the bank. Only opt for this strategy if you have sever cash flow problems in the short term; otherwise the faster you pay off your debts to be financially free the better.
The only way to successfully move out of debt is by cutting down your expenditure in the initial days when you start rolling out your debt repayment plan. Lowering your expenditure helps you to save more money that you can channel to paying off most of your debts in a shorter period than it could take if you remain stuck with the credit period in the loan contract. Cutting down your monthly expenses to necessities only and complimenting that with finding an extra job to increase your monthly income will create a larger pool of cash every month to use in offsetting your debts much faster. This however calls for a radical lifestyle change in terms of adapting to longer working hours with no luxuries for some time until you are financially free.