10 Steps you can consider to free yourself from Debt

Mixed race woman reading bills on sofa

Money can be an emotional and slippery topic especially when it touches on the subject of debt, which many Kenyans aren’t comfortable discussing. Whether you are employed or run your own business, you may find yourself trying to cope with business loans, student loans, mortgage payments, car loans, unpaid bills and so forth.

Trying to find your way out of debt can sometimes feel like a hopeless exercise. You may be so focused on the problem at hand that you may overlook some basic steps to freeing yourself from debt. Alternatively, you could be trapped in a  cycle of debt and you can’t seem to come up with new ideas. However, that doesn’t have to be the case. Here is a simple guide to help you reduce your debt burden as you begin the journey to financial freedom.

Create a Budget

Coming up with a plan that takes into account spending against your income is a smart way to manage your finances. It will assist you in making sure you spend less than what you earn. The budget will also help you stay on the straight and narrow when it comes to your current debt payments.

Pay above the minimum required

Ensure you always pay more than the minimum amount. By making only minimum loan payments, mortgages, student loan or credit card balances each month, it can take a long time for you to offset the debt due to rising interest fees and other charges.  By paying an extra amount on top, you can significantly reduce the time you will take to pay the loan plus save money on interest charges in the long run.

Settle your most expensive debts first

One smart  way of reducing your debt burden is making minimum payments on all smaller debts with the exception of one. This will be your most costly debt in regards to interest payments. Once you have identfied the debt focus all your energies and resources towards clearing it.

Once you have cleared your most expensive debt, move on to the second most expensive item in terms of interest and implement the same strategy. If you stick to this method and are not in the meantime acquiring new debt,  you will be able to clear your debt in a short period of time.

The strategy where you make minimum payments on all your smaller debt balances, while you knock out the highest interest debts in descending order is known as the avalanche method.

Spend money on what you really need

You may have heard the saying, “you can have almost everything you want; you just can’t afford everything you want”. Many people have wishes and needs that are bigger than their paychecks, and to fulfill them they end up spending money they don’t really have. A better approach would be to refrain from purchasing non-essential items using credit and instead save the money to pay down your current debts.

You will find out once that is done, your priorities may have changed and you can use the saved funds to address more important financial matters.

Purchase a quality used car instead of a new one

What most people don’t realize is, when a new car leaves the showroom it begins to lose its value. For instance, a car costing Ksh. 1,000,000, once purchased will lose Ksh. 400,000 in value over the next four years. That aside, you still have to consider maintenance costs such as fuel expenses, insurance payments, packing fees, regular servicing just to name a few.

It reaches a point where it’s no different to tossing out Ksh. 500 notes out of your car window once a week. A quality used car can cost you less compared to a new one and the savings could go to repaying your debt. However, if you decide to go ahead and buy a new car, it’s advisable you purchase one that has a good fuel economy. Ensure you retain it for 10-15 years as a way to stretch your money and keep your debts at a minimum, therefore saving enough to buy a new car in the long run.

Consider having a single car in your household

If you have two cars in the family are in debt, it may be time to consider selling one and opting  for using public means, walking or carpooling, to move around. An average car owner will spend Ksh. 500,000 on operating and maintaining the vehicle for about five years. This money could go a long way to paying down your debt rather than being an irritating expense.

This does not mean you have to sell the car right away instead, you can choose to leave it parked at home and reduce the insurance premiums to only leisure use. Try and figure out if walking, cycling, and public transport can work for you.

While using public transport can be irksome at times, you can end up saving up to 80% of your income and channeling it to your debt payments and family upkeep.

Get a second job or side hustle and pay down your debt consistently

A common way for many people to reduce their debt burden is to work double shifts or get a second job. While it is not ideal for everyone, if you can make it work, you could significantly reduce your balance within a few years. For this to be successful, all the additional income must go to debt repayment.

You can also consider generating some extra cash to reduce your debt by taking advantage of a hobby you enjoy, or a skill you have. A good example would be, if you are proficient in writing, you can freelance articles for newspapers, blogs, media companies, or join a freelancing platform. If you are talented, think about selling your creations on Etsy.

You can also use your home to generate some additional income. You can rent out space, a room, your basement on a platform like Airbnb, or to someone recommended to you.

Refinance your mortgage

You can consider consolidating all your debts into your home if you determine it has enough equity. If the equity in your home is insufficient, extra mortgage insurance costs could end up being expensive. Make sure you thoroughly evaluate your options and seek advice from another party apart from your lender (since they would benefit from you choosing this option).

Similar to debt consolidation loans, when folding up debts into your mortgage you need a budget that allocates funds to savings. Otherwise, you will end up being tempted to borrow more cash when ‘emergencies’ arise.

Keep track of your expenditure and scale back in some areas

You won’t know how much you can spend until you start implementing this strategy. For most people, this method can save them almost as much money as working double shifts. Ensure you track what you actually spend, and not what you think you should be spending during the month. This exercise is only successful if you are honest with yourself, and most people are usually surprised by what they learn about their spending. Upon learning your spending habits, you can identify areas you need to cut back on, and the money saved can be directed towards your debt payments.

Cut back on grocery spending

To save money, look out for groceries when they are on sale and proceed to stockpile on them. This way you can skip on buying groceries during the month and live off the food you have accumulated. You can store non-perishable groceries such as cereals, canned items and things you can freeze like meat and bread. By stockpiling your cupboard with groceries when there is a sale and skipping one grocery shopping trip in the month, you can save up to 25% on your shopping bill. A household of four could save Ksh. 20,000-Ksh. 28,000 annually by doing this.

The success of this strategy depends on how keen you are on taking advantage of sales and offers. While you may still have to purchase perishable items like milk, vegetables, and fruits, but hopefully you won’t have to buy the rest of what you normally buy. This translates to a significant amount saved that could help settle your smaller debts.

The sooner you start dealing with your debt situation, the sooner you can have it paid off. Remember, time won’t stop whether you pay it off or not, so begin implementing a few of these strategies today. You can also visit a financial planner or browse our blog section for more tips on personal finance.