Trust in abundance but pay down your debts: 5 common sense steps to becoming debt free

There is a saying in Islam -trust in Allah but tie-up your camel! The concept being that while it is right and proper to trust it also makes sense to have an insurance policy. Applying the same principle to your personal finances means that whilst the key to a financial secure, successful life is developing a wealth and abundance mindset, it is also prudent to manage the money that flows into your life effectively.

In the latter part of the 20th century western democracies became fuelled by debt. Instead of referring to it as debt we started to think of it as credit. Perhaps this was our way of masking the truth. How attractive does the idea of a debt card sound as opposed to it being called a credit card. The advertisers convinced us that credit was a good thing because it enabled us to have whatever we wanted now. Previous generations had to work hard, save and most crucially, WAIT to own the expensive objects of their desires. It seems odd that we now think of it as being unusual to have to wait for something, however, this was our experience for generations and approximately two thirds of the world’s people still operate like this today.

Clearly buying things can bring a great sense of joy and if you are purchasing goods for this reason it will seem tempting to use money that you don't have in order to feel good. However, if you buy something to feel good, how long does that feeling last? For example buying a new pair of shoes may make me feel good the first few times I wear them but after the fifth or six times they become old and the good feeling fades. If we base our feelings of happiness on material possessions we create a never ending process of having to buy things in order to make ourselves feel happy. If our resources are limited then it is easy to see how we can end up in a vicious cycle of debt fuelling our feel good purchases.

If you want to live a debt free life one of the things you can do is to seek professional advice from a financial adviser. However, there are some common sense steps that you can take to use your existing resources to systematically reduce and eventually eliminate your debts over a period of time.

Step 1. Decide to get out of debt.

The hardest part of getting out of debt is the decision to do it. Many people dream of being debt free however few are willing to go through the hardship and delayed gratification required in order to achieve it. There's no getting away from it, getting out of debt takes discipline. The old saying: the way to hell is paved with good intentions is particularly applicable when it comes to getting out of debt. It is easy to start off well intentioned and then what do you do when your friends call you to invite you out for an evening meal and going means breaking your budget and extending your credit?

The solution is to know why you are doing it. If you're why is big enough and strong enough this will give you a reason to stay on course – it is self fuelling motivation. So once you have decided that you want to get out of debt take some time to write out why this is important to you. One way of doing this is to write yourself a letter from the future describing what your new debt free life is like. What have you been able to achieve now that you no longer have any debts? What impact has knowing that you no longer have any debts had on your feelings about yourself, about others and on your relationships? Make your description of your new debt free life as vivid as possible. Then carry your letter around with you so that you can refer to it when you need staying power.

Step 2. Assess your current financial position

Whilst it can be really scary to take a long cold hard look at your finances; unless you have the knowledge about what is truly going on you will not be in a position to understand what you need to do in order to become debt free. So take a deep breath and asked yourself the following questions;

1. What are your total earnings?
2. What is the true cost of your living expenses?
3. What is the total of your liabilities, i.e how much money do you owe?
4. How much do you have in savings?
5. Do you have any assets?

Step 3. Create a budget

In order to know how much money you can put towards your debts you need to create a budget. Use the information from step 2 to create a budget listing all your items of expenditure, which will include money you pay towards debts as well as money you save. It helps to organise them under headings such as housing costs (e.g. mortgage/rent; property tax), transportation (e.g. car tax, travel to work, fuel), utilities (e.g. gas, electricity, phone, Internet etc), insurance (e.g. life, building and contents, appliances); living expenses (e.g. food, entertainment, pocket money, credit cards etc). The important thing is to choose headers at you find easy to use. The objective is to create a user friendly tool that you will use on a regular basis to manage your budget.

Step 4. Pay off your most expensive debts first



For home owners usually their largest debt there is their mortgage. Even though mortgage interest rates are low compared to other debts, because they are scheduled over many years a considerable amount of what you pay back is in interest. If you pay a little extra on your 25 year loan each month you can save a lot of interests. Often it only takes making one additional monthly payment each year. Doing this can pay your mortgage off a few years earlier which will save you thousands of pounds in interest. A simple way to do this is instead of paying your mortgage once a calendar month; pay it every four weeks, i.e. 52÷4=13 payments a year.

Step 5. Heed the advice of your credit card provider and pay more than the minimum payment each month

You may have noticed a statement on your credit card bill that says: "if you make only the minimum payment each month, it will take you longer and cost you more to clear your balance". Guess what – they’re right! In addition all the time you will be paying very high (and sometimes even exorbitant) interest rates on unpaid balance. By increasing the amount you pay towards your credit cards you can pay the money back sooner and pay less.

What strategies do you use to manage debt? Please share your experiences so others can benefit from them too.