If you don’t know what a debt spiral is, let’s see a small explanation. Let’s say that you are in your teens and you have a credit card made for a small amount of money. Some time passes away and you can’t cover up the card, but you need a study loan. You go to the bank and you obtain a loan to pay for your studies. Now you have the credit card and the studies loan. After some other time, you are still in debt to the bank with those two credits, but you also want to get a car, and you go again to the bank – take a credit for a car, and now you have three credits that you have to pay for.
The debt spiral comes when you go from credit to credit, without covering up any of them, and you’re facing the situation when you can’t pay your loans anymore.
Avoiding this and getting out of it it’s extremely important, so we’re going to talk about this right now. Let’s see what you can do.
Step 1 – Know the Income
No matter what age you are and what you are doing, if you’re facing a debt spiral then it’s time to get out of it. The first step that you have to do is determine the available budget that you have every month. The budget is represented by all the money that enters your pocket.
You can consider anything – the money that you take from your job, the scholarship (if it’s the case), and the money that your parents give you, what your spouse makes, what the second job brings you and so on.
Write on a piece of paper two columns – for IN – write the money that you earn and for the second column – DEBTS, we’ll go to step two.
Step 2 – Know the Debts
Consider a debt anything that you must pay. In the second column write the money that needs to go to the bank – write down the sum for each credit, in a decreasing order. After this, write down the utility bills – you need to pay for the rent, the phone, the electricity and so on.
After this, write the money that you usually spend on food – no restaurants, no fast foods, no fancy clothes, nothing else that you don’t actually need. Write there just the money that you really must use – for food, for buying hygiene items, soap, and other items that you need around the house every month.
Step 3 – Know Where to Cut
If you know that you like to eat dinner at a restaurant each night or go to the club each week-end, then this has to stop. Those money could be used for something else, so make a third column where you write Luxury Items, and write there all these things – what you usually spend on a dinner downtown, the money that you spend in a club each week-end, the money you spend on clothes and other useless items.
Now, make the total for this column and you will see how much money you can save each month if you quit doing unnecessary things.
Step 4 – Pay More
Now that you know how much money you can save, it’s time to think about what you can pay faster. It’s important to start with the biggest credit / loan that you have and start paying for it. That money that you can save each month from restraining yourself from buying luxury products, you can use for paying that credit faster. It might not be more than what you already have to pay, but in some cases you might be surprised to realize that you could save up
about the value of the bank rate.
If you pay more for the credit of your choice, you will do two things at once – first of all, you will fix your financial situation and second – you will get rid faster of that credit.
Step 5 – Talk to a Financial Planner
In case you can’t handle everything by yourself, but you still want to solve things out, then you can take all your papers and see a financial planner. They can fix you up with a plan for paying all your debts. They usually set a certain sum of money that you have to give each month, taking into consideration your income and your mandatory monthly spending.
Then they will pay out each of your credits according to the agreement that you have made with them. It’s a good step, but you can do this by yourself if you’re determined enough to get rid of the debt spiral.