Well, okay, I know that not all debts are bad, a mortgage loan for the purchase of a house or a loan to study a master’s degree and train you, in general, you could say that they are “good debts.”
However, those destined to buy unnecessary things and that also have high interest rates are simply horrifying, if you want to have healthy bonds and freedom in your life .
The higher the interest rate and the longer the debt has
The more money you lose without getting anything in return, and gradually your financial freedom, your peace of mind and, therefore, your quality of life is reduced.
The money that you are dedicating to the payment of the debt, is money that you could be using for much more productive aspects for you, for example:
- Save to start a business
- Save for your retirement
- Save for the trip of your dreams
Being in debt brings another huge risk together. You can spend months paying religiously, and any disaster will return you to the start box, be it the loss of work or a car breakdown, during the duration of the debt any small thing that goes wrong will start you again.
The key point, to understand what it means to borrow, is that debts do not really cost money , or at least, that is not their main disadvantage, but the loss of freedom and the high risk of entering a vicious circle of debts to get out. of other debts.
I have already put fear in your body. Now we go with the solutions.
Avoid entering the Vicious Circle of Debts
To avoid entering the circle of debts, the best thing you can do is:
Build a Small Emergency Fund
A fund that allows you to meet the unforeseen expenses that arise. It does not need to be very large, it will depend on your situation, but with about 1,000 euros it should be more than enough.
If you are in debt, make the minimum payments and use all the savings to create this emergency fund.
Once created you will be able to direct all the savings to the payment of the debt and you will end it quickly and with the added peace of mind of having an emergency fund that protects you from unforeseen expenses.
Please, DO NOT touch the emergency fund , it is only for unforeseen expenses, not to buy you such a beautiful dress or go to dinner with friends.
Also do not use it to pay debt, this emergency fund is your life jacket against the economic problems that may arise.
In this way you will avoid falling into the vicious circle of debts.
If a misfortune occurs and you must spend part, or the total, of your emergency fund, stop the extra payments towards your debt, and rebuild the emergency fund again.
Don’t forget, the emergency fund has priority over paying debts .
How Can You End Debts?
Now let’s see how we can get out of debt, in the fastest and easiest way, for this it is very important that you do:
A Plan to Pay Debts
Write down all your debts, sort them by interest rate (from highest to lowest).
Once the minimum fee has been paid on all debts, the savings should be directed to the debt with the highest interest rate , once this debt is finalized, go for the next one and so on until it is debt free.
This is the most economically efficient way, since we first eliminate the most damaging debt, the one with the highest interest rate, ultimately paying less interest.
However, psychologically it can be more profitable to order the debts according to the amount that remains to be paid from each of them, of which less amount is left to the one that more, in this way, we will see in a much faster way as we are taking off debt, which helps motivate and stay stronger .
Do not forget that personal finances, in many cases have more personal and psychology than finance, and everything that helps motivate you is welcome.