Reduce debt and find money for investing
The beginning of the year signifies change. Go to any gym during this time of the year and you will notice an increase in new members. That’s because a lot of people decide that with the new year they are going to get fit and create a new image and way of life.
But on top of curbing your calories and getting into physical shape, why not also work on slimming down your debt creating some cash flow and investing in your financial future.
Here are nine ways you can start doing so:
1. Take inventory. The first thing on your list should be to collect and log all of your bills, loans and other sources of debt to determine just how much money you owe. Awareness and then real fear is the factor that leads to effective behavior changes. Once there is an emotional realisation that you are spending more than you earn then it forces a change of thought, the impact is real.
2. Analyse your spending habits. Keep a spending log for a full month and assess just how much and where you are spending your money, also factor in how much you are currently paying for your past lifestyle choices and what you’re expecting to pay for in the future. Get an understanding of what worked (like saving a percentage of your pay cheque per month) and didn’t work (like eating out too much and relying on credit cards) can help you make better choices for your future.
3. Cut your monthly expenses. When you are aware of what you’re spending and know where to look, you can focus on the most obvious strategy to reduce debt: decrease your monthly expenses. Ask yourself “how much of your current cash flow is going towards debt payments.” Then, make arrangements to have them automatically deducted from your account. It’s one less thing you’ll need to think about and it will ensure timely payment. Another strategy is the transferring of your home mortgage or line of credit from a variable rate (one that is dependent on the current market) to a fixed one if you think interest rates are going to continue to rise. However if you become dedicated to paying off debt you are more likely to pay it off at the variable rate as fixed rates are always biased in the banks favour.
4. Pay off the debt you do have. This can be the fun part and where you get great momentum. Firstly list off all your debt, the amount, interest percentage and minimum monthly payments. Then I suggest you start by calculating what I was taught as the timing index factor for debt. You do this by dividing the amount owed by the minimum monthly repayments.
e.g. $5000 owing (@10%), minimun monthly repayment is $200, timing index is 5000/200 = 25. Compared to $200,000 home mortgage (@8%), minimum monthly repayment is $1450, timing index is 200000/1450 = 138.
The lower the timing index the more it is affecting your cash flow and hence your ability to get into the investing market. Therefore pay off the lower timing index numbers first.
5. Stop spending. Yes! The only way to reduce debt is to stop adding more. I know this seems oversimplified to say, but I am amazed at how many times people don’t control their spending. Stop using credit cards, cut them up if you lack that self control.
6. Work with others. If you have done all you can, but still can’t reduce your debt, consider contacting creditors. You may be able to consolidate your debts into a single account sometimes using any equity you may have in your property if you have any. Often this may provide credit at a much lower interest rate and accelerate your ability to pay off these high rate debts a lot quicker.
7. Increase your income. Like dieting and exercising being the best combo for losing weight. Increasing your income and reducing your spending is the best equation for financial wealth. This means taking on more responsibility or hours at work or getting a part-time job, freelancing, or doing some consulting work. It may also mean looking for other forms of passive income.
8. Change your lifestyle. You could pay off some of your bills, stop spending for a while and work on increasing your income, but if you want lasting change, it’s best to work on changing your lifestyle. How do I mean? Live within your means. Find the challenge and creativity of living life to the fullest on a humble income. This could mean using coupons, waiting for items to go on sale, eating out less, or forcing yourself to save up and pay for things you need in full, rather than buying on impulse and on credit.
9. Drastic times call for drastic measures. If you’re really up to your eyeballs in debt, the previous 8 steps will take time to be fully effective. So in the short-term, don’t hesitate to take drastic measures. Sell your car, jewelry, or even your house if you have to. It will definitely take some courage, but in the end you may realize you didn’t really need all that “stuff” to begin with. You may even find that you feel not only lighter and financially healthier, but emotionally richer as well by reducing debt.
Want to create passive cash flow to reduce debt?
Dr Cash Flow is an investor who purchased and online stock market education and was able to go from novice investor to replacing his income within a six month period. He has become passionate about making others aware of how they can learn to reduce debt, invest and create their own secure financial future.
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