5 essential steps to help you recover from debt

At times, taking out a loan or several loans might seem like such a simple process. However, things can get complicated when you borrow more than you can afford. This slippery slope potentially leads to missed monthly repayments and bad credit. Eventually, you can find yourself stressed and struggling to breathe under a landslide of debt. Does this sound like your situation? If so, then this article will be a tremendous help in guiding you towards the road to financial recovery. Before we dive in, here’s a summary of the key points to be explored:

• How to get familiar with your debt situation so you can implement a plan that works.
• Moving away from bad debt and towards financial freedom.
• How to secure your future from more financial disaster.

It’s easy to feel overwhelmed when faced with so much debt, but there is a way out, and most South Africans have discovered it by following these five crucial steps:

1. Make all the necessary calculations

This process requires you to be 100% honest about the current state of your finances. Even if the numbers don’t look good, it’s important to know the ins and outs of your cash flow system. An excellent first step is to calculate the total amount of money that you owe. Next, you may look at your income and how much you spend on monthly expenses. This helps you to define your starting point clearly. From there, you can figure out how much work needs to be done and how long it will take until you become debt-free.

2. Create a financial map

This simply means coming up with reasonable goals for financial recovery. Now that you have a starting point, what endpoint are you aiming for? Linking the two creates a financial map that motivates you to move forward. Examples of financial recovery goals you can set for yourself include:

• Improving your credit score
• Paying off specific debts by a certain deadline
• Freeing up more money by cutting out some expenditures from your monthly budget

When outlining these goals, be sure to keep them realistic, specific, and time-based. For example, when you say, “In three months or 90 days I should have paid off all my store clothing accounts,” you’re setting a clearly defined goal that can be achieved and used to measure progress.  

3. Come up with a suitable plan

When you have your financial recovery goals in place, the next step is to draft a plan that takes you from your starting point (your current state) to your endpoint (your goals). The easiest way is to examine your goals one at a time. Take the goal of improving your credit score, for example. To achieve this particular goal, you can plan to:

• Set a reminder, so you pay all your bills on time
• Obtain an updated and current copy of your credit report and go through it in case there are errors that can raise your score once corrected
• Prioritise payment of outstanding bills that are contributing to your poor credit score.

Other debt management options you can include in your plan are as follows:

• Applying for a debt consolidation loan that enables you to save on interest.
• Cutting out unnecessary costs such as luxury items in order to divert more funds towards paying off your debt.
• Seeking debt counselling and learning how to manage your budget and finances properly. 

4. Put your plan into action

It goes without saying that your current debt situation is unlikely to change without disciplined action. Now is the time to consistently and diligently take action that helps you recover from debt. While doing so, keep the following key ideas in mind:

• It may take time to recover fully. This is fine as long as you continually head in the right direction.
• You may need to adjust your earlier financial recovery goals and plans as your situation changes, and as you learn what works and what doesn’t.
• Remain accountable to yourself but, at the same time, avoid setting unrealistic expectations. 

5. Work on building an emergency fund

Paying off debts is not much fun, which is why having a “piggy bank” can keep you motivated and help balance things out. While you recover from debt, you might question whether it’s better to pay off debt or save. However, focusing too much on one option can leave you open to other financial pitfalls. If all your funds go towards paying off debt, the next time you have an emergency, you’ll have no savings to fall back on. 

You might have to borrow money again, and this just keeps the debt cycle going. On the other hand, saving money and ignoring your debts results in even more debt as interest and additional fees pile up. Through careful planning, you can recover from debt and set up your emergency fund at the same time. 

If you manage to carry out these five simple but effective steps to the best of your ability, then congratulations! You’re well on your way to financial recovery and security. Remember, this journey takes time, but it is worth the effort.

Photo by Richard Jaimes on Unsplash