8 effective strategies to clear your debt￼

With discipline, determination, and smart financial planning, it is possible to overcome debt and regain control of your financial life.

Written by Sanjeev Sinha

August 5, 2023 00:30 IST

The first step to tackling debt is to create a comprehensive budget. (IE)

Depending on how debt is managed and utilised, it can be a helpful financial tool as well as a potential risk. When used wisely, debt can help achieve goals and take advantage of opportunities. However, excessive debt, high interest rates and irresponsible borrowing can lead to financial stress and negative consequences.

It is essential for borrowers to carefully assess their financial situation, budget, and repayment capacity before taking on debt and use debt responsibly to achieve their financial objectives.

Here are some effective strategies to clear your debt:

Create a budget

The first step to tackling debt is to create a comprehensive budget. List all your sources of income and track your expenses diligently. Identify areas where you can cut back and allocate more funds towards debt repayment. A well-structured budget will help you understand your financial situation and prioritise your debt-clearing efforts.

Adhil Shetty, CEO, Bankbazaar.com, says, “Having a budget is crucial when clearing debt because it provides a clear roadmap for managing your finances effectively. A budget helps you track income, expenses and debt payments, allowing you to allocate specific amounts towards debt clearance each month. It prevents overspending and ensures you stay disciplined in your financial approach.”

Choose between Snowball and Avalanche methods

Two popular debt repayment methods are the Snowball and the Avalanche methods. In the Snowball method, you pay off the smallest debt first, gaining motivation as you clear off individual debts. The Avalanche method involves paying off high-interest debts first, potentially saving more money in the long run. Choose the method that aligns best with your financial situation and psychological preferences.

Debt consolidation

Debt consolidation involves combining multiple debts into a single loan with a lower interest rate. This can make repayment more manageable and simplify your financial obligations. Be cautious when considering debt consolidation and ensure that you thoroughly understand the terms and conditions of the new loan.

Increase Your Income

Higher income can accelerate your debt repayment journey. Explore part-time work, freelancing opportunities, or starting a side business. Any additional income you earn can be channelled directly towards clearing your debts.

Build an emergency fund

Creating an emergency fund is crucial to avoid falling back into debt when unforeseen expenses arise. Aim to save at least three to six months’ worth of living expenses in an easily accessible fund or account.

Avoid new debt

Resist the temptation to incur new debts while clearing existing ones. Use cash or debit cards for purchases instead of credit cards. Delay major expenses until you have cleared your debts and built a stable financial foundation.

Seek Professional Advice

If your debt situation seems overwhelming or you are unsure about the best approach, consider seeking advice from a financial advisor. They can help you formulate a personalised debt repayment plan and provide guidance to improve your financial management skills.

Stay Patient

Clearing debt takes time, discipline, and patience. Stay committed to your debt repayment plan and celebrate small milestones along the way. Visualise your debt-free future to maintain motivation during challenging times.

By creating a budget, choosing an appropriate debt repayment strategy and taking steps to increase your income, you can effectively work towards becoming debt-free. Building an emergency fund and avoiding new debts are also essential components of a successful debt-clearing journey.