Debts pile up when you spend more than your means, and your regular cash inflow (like income) cannot replenish what has been spent, resulting in a deficit in your overall money stash. If this continue (payments more than income), you will have accrued debts in just a short amount of time.
While one can subsist, and even live the “high life,” without savings (income equals expenses), one cannot sustain a spending lifestyle when not only is there no savings to speak of, but there is deficit which piles up into accrued debt, the point when the debt continuously accumulates at a regular rate.
In this case, even if spending activities have been put to a halt, debt continues to grow because of interests, resulting to an accrued debt. When one reached the level of an accruing debt, simply quitting spending which is the frequent advice given to stop accumulating debt, it will not simply work.
Accrued debt is the total payable debt at a given time with a marked increase from the principal and the initial terms of interest payment. It starts when a person pays only the interest for a pay period (loan) or minimum amount due (credit card, credit lines). One accrues debt as interest grows on top of the money owed until everything has been paid back.
Is it possible to detangle oneself from accrued debt? How does one become free from accrued debt?
The good news is yes. But before taking on practical steps to get rid of accumulating debt, it is important that a debt-ridden person have the willpower and the determination to do this, since the process entails a drastic change in lifestyle and personal, even family sacrifices.
The most important step prior to doing actual mitigating actions versus accruing debt is to stop accumulating new debts. This include no spending using credit cards or credit drafts. No new loans and no borrowing of money, be it from a formal creditor or from friends and relatives. Doing these two things will help put a stop to the cycle of accumulating debt.
Now, what to do with accrued debt? The following are the steps to stop debt from accruing.
Make an inventory of your scheduled payments (these are different from debt payments):
Calculate the realistic amount needed for these group of expenditures. Note that these “payables” are the basic, important ones you need to fulfill to lead a normal, everyday life.
The aim of revisiting the basics of budgeting is to go back to that important thing one has overlooked and which resulted to the debt accumulation in the first place: spending beyond your means, throwing away money on unnecessary things and using money tied to debt accumulation to spend for such non-necessities. Once you have the realistic calculation of these important payables, you should stick and restrict “outflows” only to this list.
Make an inventory of all your debts: credit cards, student loans, home mortgage loan, car loan, store credits or credit lines, personal debts and others. Group these into high-interest, low-interest and no-interest loans.
Interest-based grouping would be more practical than value-based grouping since the factor of interest has big impact on the debt accruing. Whereas even if one has a debt of say $5,000 but is a low-interest or no-interest debt ( for instance, a family loan), it does not have huge impact on the accrued debt.
For the high-interest debts: Opt for a Debt Consolidation. This would be the simplest way to manage several high-interest debts with various range of interest rates. Debt consolidation means rolling off all your debts (in this case, the high-interest debts) into a single loan and single interest rate. While there are those who insist that there could be a downside to debt consolidation, these would be instances when the debtor, not the debt consolidation itself, is to blame.
Debt management professionals agree that it is possible to save a good amount of money through debt consolidation, as much as half of the original total payments required. Also, not only does one make the actual payment and control the debt accruement, there is also that restored peace of mind since debt payment has been centralized and not spread as separate obligations.
For the low-interest debts: Focus on paying the principal amount as much and as early as you can, then the interest becomes lower and the payment easier. There might be terms that entail a fee if you settle your debt shorter than the agreed contract. Often, this “penalty” is smaller compared to actually maximizing the length of the loan maturity. In short, you still go for lesser total payment and faster eradication of this set of debts.
For the no-interest debts: Fulfill your payment plans and stick to it. Just because it is a no-interest personal loan does not mean you can throw it in the backseat of your payment obligations. Do not take comfort that family or friends will understand. In most circumstances, these persons loaned you the money with an agreed schedule of payment which they rely on to receive from you promptly and diligently, having their own money matters and payments to attend to.
Simply put, always pay your debt, no matter how much, how long it takes and from whom it was loaned. (There are also instances when even personal, no-interest loans were turned into immediate payment dues with interests applied, when an aggrieved lender was forced to seek legal help to make an erring borrower return the money, despite being a family member or a friend. You certainly wouldn’t want your personal debt to go this far.)
These should be pretty straightforward and practical: spend more time at home, switch to cheaper utilities providers, walk or ride the bus, cook your own meals. Elementary, my dear Watson, as the cliche goes. If you must spend for special things, people and occasions, do spend for these, but responsibly and never for ostentatious reasons.
For some, living below the income level is endured until after debt obligations have become less stressful and more manageable. But for the wiser ones, opting for living below your means as their new lifestyle is the better way to go. Living on less doesn’t necessarily mean living disparate. Truth be told, the basics of living as one can review in the budget list on Step 1 are the ones that do not entail big amounts of money.
Many people, once debt-ridden but who have reverted to a downgraded lifestyle, have found the joys and wisdom of living on less, resulting to more money, new financial freedom and a more secure future. In these cases, the need to face their uncontrollable accruing debt and finally doing something about it proved to be a blessing.
Finally, we’ve come full circle with the basics of financial (and debt) management with the last step, another back to basics: Save. Start saving again. But a word of caution on this. Don’t get caught up on immediately saving again that you forget the real problem and the solution: Debt eradication. Controlling your debt accruement.
While in this process, it is just right to rechannel what savings you have (without compromising your everyday or short-term security) towards the payment of your accrued debts (for instance, payment of the consolidated loan you have taken out and your low-interest and no-interest loans).
Go back to savings mode only when you are debt-free again and can refocus on building back your personal wealth.
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