I must admit: the title of this column is misleading. A priori, this year has nothing special for you to leave your debts behind. It is not that 22 is the lucky number or that the third year of the pandemic is the expired one and, therefore, there will be unique opportunities that previous years did not offer. It’s not about that.
However, although it may be misleading, the title actually hides a noble purpose: that you start right now (and not tomorrow or the day after) a plan to recompose your financial situation.
The ideal time to get out of debt is as soon as possible. Otherwise, interest will continue to accumulate and it will be increasingly difficult to reverse the situation.
For this reason, today we will review four tips to start the financial detox. If you are willing to follow the plan or share it with someone who needs it, I invite you to read them. Let’s get started!
You got into debt in the past. That’s it, it’s a fact, you can’t change it. Nevertheless, What you can change is the way you deal with the problem: It’s one thing to pay interest on a debt you can’t pay off right away, even though you plan to someday, and quite another to add fuel to the fire by taking on more debt to pay off that interest instead of cutting costs.
Let’s put ourselves on the other side of the counter: before turning money over to you, the lender (bank, finance company, etc.) will take a financial X-ray of you. It will review your total assets and liabilities, your current income, and your credit history. Most likely, in the current scenario, your income will rise a little in nominal terms, but below inflation. Instead, youYour liabilities (debts) will increase well above the price index as a result of the high current interest rates and your profile, which speaks of a debtor person with increasing difficulties in paying off their obligations and accessing new credits.
Your risk profile will lead to daring and usurious lenders to demand exorbitant interest. You can blame others, but this is nothing more than voluntarily increasing the cost of your debt.
Let’s go with examples of financing at very high rates instead of cutting costs:
– When you have a self-saving plan and at the same time you finance the expenditure in the supermarket with your credit card.
– When you have a mortgage loan Y you begin to pay the minimum payment of the credit card.
Such harmful practices will sooner rather than later lead you to pay interest that far exceeds the debt you originally took on. Once you’ve taken on a debt, you shouldn’t add other obligations. Otherwise, the snowball will grow and fall right on your back.
Let’s assume this favorable scenario: not only do you agree with the previous point, but you also have some extra pesos that you were able to generate and you are evaluating the possibility of pre-canceling (advance payment) of your debt to reduce the amount you pay every month in interest concept.
In case you have more than one loan in your backpack, the question arises about what debt should you reduce first. Most financial advisors will answer that it is best to attack the one that implies a higher interest rate, but the advice is wrong.
The Index of Cash Flow is a system developed by Garrett Gunderson -author of several best seller on personal finance in the USA. At Priority is given to debt cancellation based on cash flow that each of them subtracts from the debtor month by month.
The calculation is as follows:
Total amount of debt to be paid / Minimum monthly payment
The lower the result, the more urgent the prepayment of that debt will be.
The Cash Flow Index then tells us that, if the number in question is between 0 and 50, the debt is very harmful (or simply harmful) for our pockets, so it is advisable to prepay it as soon as possible. A result between 50 and 100 speaks of a not so harmful debt that should still be paid attention to not lose sight of its evolution. From 100 onwards it would not be as relevant for our personal finances. Therefore, the stimuli to pre-cancel it decrease.
The Credit cards oh go instant loans offered by banks and fintechs are examples of immediate credit that a debtor seeking to improve his situation should eliminate from his financial life.
The recommendation is leave the plastics resting in a drawer in the house instead of carrying them around all the time. That way, temptations will be avoided.
If the person has several cards, the recommendation is to cancel them until only one is left. It may seem painful at first, but it is the only way to seriously curb the increase in debt. Paying for purchases with cash, debit card or QR (without using credit) are the best options under these circumstances.
Most chronic debtors directly or indirectly involve family and friends in their debts And he does it in a very harmful way: he asks them to act as guarantors of his loans or, worse, he directly asks them to borrow money to “plug holes” of “very important”. In many cases, they surreptitiously take on debts and harm loved ones or people close to them using their name or money.
It is clear that it is essential to change this way of acting. If the decision is to involve family and friends, andThe debtor must talk to them and transparently detail their financial situation and even judicial, if there was a legal conflict in force or at the door.
Speaking honestly is the only way for the debtor to receive effective help from those around him, who will be able to understand him and decide what to do and how to counteract the situation.
Needless to say that economic aid should be eliminated as an option, since it only serves to postpone the problem, but not overcome it.
The least advisable of the strategies for a chronic debtor is to continue delaying the problem out of shame or fear of misunderstanding and marginalization.
We leave for another column relationship between debts and a person’s time, another aspect to take into account. I would say, essential.
Happens that the person who owes ends up renouncing the sovereignty of his time. This becomes the property of the company for which he works (“if I get fired, how do I pay the debts?”) and the bank or fintech that lent him the money (“I work overtime to pay the interest ”).
Take the four steps we recommend above It can allow you to recover a good part of the time to dedicate it to your own projects and leisure, as well as gain in peace of mind and reduce financial stress.
The year is just beginning. stop procrastinating and Dare to take the first step towards your debt relief. Your personal finances will thank you for the rest of your life.