Do you know what a debt is? Let's go further, do you know what is the best way to pay off debts? Many people believe that the debt comes from the delay of an account or even the default, but it is not so.
We have to relate the debt to any outstanding account, regardless of whether it is overdue or not. That is, a loan, a portion of a certain account or a credit card bill.
One search the National Trade Confederation (CNC) indicated that over 66% of UK citizens are in debt. From debts with the card, credit card or even with the bank. THE default is 25.2%.
The big question for many families is: what is the best way to pay off debts? The truth is that there is no magic formula, but it is possible to plan to get out of the red.
To help you with this article, let's talk about:
- What is the difference between an expensive debt and a cheap one ?;
- What does it mean to exchange an expensive debt for a cheap one ?;
- Should I invest or pay my debts ?;
- 10 tips to settle debts;
- HR Consultants UKy: an alternative to pay off debts.
Are you interested in the subject? So, go ahead in this article and have a good reading.
What is the difference between an expensive debt and a cheap one?
According to Credit Protection Service (SPC Brasil) and the National Confederation of Shopkeepers (CNDL), 26.3% of UK citizens have no discipline in the organization of their personal finances, ignoring gains and expenses.
The problem is that if you don't plan, financially speaking, you end up generating debt. If they are not well managed, the consequence is defaults, negative name, accounts always in the red and an increase in debt, changing it from face to cheap.
But how to differentiate? The big difference between cheap and expensive debt is in the interest rate. The higher the rate, the higher the speed at which your debt will grow.
For example, the overdraft interest rate is 150% per annum. If you are negative £ 2,000.00 in overdraft, in one year, if it is not paid, your debt will rise to £ 5,000.00.
Therefore, the interest rate determines and separates an expensive or cheap debt.
What does it mean to exchange an expensive debt for a cheap one?
In order to answer the great theme of this article, which is the best way to pay off debts, it is necessary to know how to exchange an expensive debt for a cheap one. But what does it mean?
We can exemplify this exchange by citing a person who takes out a loan with lower rates and longer payment times to pay off a debt with higher interest rates and shorter payment times.
In this sense, that person would be exchanging an expensive debt for a cheaper one. To do this there are some important steps, they are:
- Determine, in view of your monthly expenses, a maximum amount to spend, contracting debts that you can actually maintain;
- Renegotiate the amount with the creditor, trying to decrease the price of the installments and increasing the payment term;
- Evaluate the interest rates of the market, its accounts and the CET (Total Effective Cost);
- Consider a credit portability, transferring the debt to another bank, with lower interest rates;
- Unify debts in the same bank;
Pondering these points is sure to help you take a break from your budget to definitely pay off your debts, swapping the most expensive ones for the cheapest.
Should I invest or pay my debts?
The first step, to find out the best way to pay off debts and if the ideal is to pay it off or invest your money, is to map the debt and make a comparison between the interest rate and the rate of return on an investment.
Let us use again the example of overdraft, which costs 150% per year. The most basic and conservative investment in the country, the Treasury Selic, today yields 2% per year (which is the Selic value today). Is it more worthwhile to pay the debt and, thus, not pay the 150% interest in the year, or invest to earn 2%?
Generally, the value of the debt will always exceed the amount you can earn from what invest. Certainly, if this is the scenario, it is much more worthwhile to pay off the debt, before starting to allocate the money for an investment.
After all, if the investment yields less than the debt interest rate, it makes no sense to invest before settling the bills.
Apart from that if you allocate part of your budget to an investment, you will decrease your budget and have less money to settle debts, and you can turn them into a snowball.
10 tips to pay off debts
To find out what is the best way to pay off debts, we have selected some tips for you to escape debt and default and once and for all get your accounts up to date.
Get a view on earnings and spending
The first step before knowing what the best way to pay off debts is to have a macro view of your expenses and earnings. Put everything on the tip of the pencil and find out exactly where your money is going.
Organize your accounts
In order to discover the best way to pay off debts, it is necessary to recognize them. So, organize them in a financial application, in a spreadsheet or in the good old notebook. Note which debts are outstanding, installments and payment terms.
Do you want to know the best way to pay off debts? So, start saving today. Anyone who wants to pay off debts needs to start by cutting unnecessary expenses.
That means cutting off that power supply outside the house, saving light, reducing bath time, eliminating those extra channels on cable TV, reducing the cell phone plan you don't use and so on. Small cuts can turn into big savings to help you pay off debts.
Check out our article on home economics tips to make your budget pay off, clicking here.
Renegotiate the values
Another important step in settling debts is to renegotiate them with your creditor.
Look for alternatives that are good for both parties, try to reduce the value of the installments, according to your reality, increase the payment time and if possible write off part of the value to decrease it in the renegotiation.
It is common that in cash payments, in some cases, the debt is reduced. So try to save over the months and years, ask for a discount and make a cash offer to your creditor to pay off the debt.
Pay higher interest debts first
It seems obvious, but many people, when in debt, no longer know how to manage their accounts or how best to pay off debts. However, when questioning how best to pay off debts, prioritize those with the highest interest rates.
This is because the tendency is for these to become the famous “snowball”, increasing monthly and annually and making you more indebted. So, write down all your debts, evaluate the ones with the highest interest rates and pay them first.
Search before you buy
It is obvious that even with debts you will have essential expenses such as food and a great tip in this regard is to do a price research before going out to buy anything.
Evaluate the markets around you, make the famous shopping list and save as much as possible.
When defining the best way to settle debts for you it is essential to establish goals and objectives. This in the sense of paying the bills.
Define clearly when you think about settling each of the accounts, noting the terms and amounts on the side. Thus, you have a macro view of your situation and can more concretely strive to achieve these goals.
Escape new debt
If you have debts, the priority should be to pay them off, so avoid making new ones. Escape your credit card and overdraft and prioritize cash purchases for a period. Making financial sacrifices is essential for those who want to pay what they owe.
Search for extra income
Is what you earn today enough to pay off your debts? Maybe not.
If so, get your hands dirty and undertake. Think about what you do well, crafts, products, sweets, savory? Everything is valid at that moment to have a extra money, ease the bills and get rid of your debts in the future.
HR Consultants UKy: an alternative to pay off debts
The reality of many families, more than 60%, as we saw earlier, is to be indebted in some way.
The big question is that when the person does not know the best way to pay off debts this can generate the so-called financial stress, which is capable of affecting the person's tranquility, attention and productivity.
The result of this is employees who are under pressure all the time and who perform well below their capabilities. However, there are alternatives in which the company can support its employees so that they do not suffer from it, this is HR Consultants UKy.
THE HR Consultants UKy it is a financial platform through which employees can request part of their salary at the time they need it, depending on the days worked.
Two HR Consultants UKy alternatives can help employees pay off debts: the salary advance and the thirteenth advance. Thus, the employee can withdraw part of the money to pay a bill and avoid delaying it, or even paying off a debt.
The salary advance, through HR Consultants UKy, takes place at a rate of 2 to 9 reais. And, from the thirteenth, 1.75% per month. In a basic comparison, HR Consultants UKy has an advance rate much lower than the interest on the overdraft or credit card, and can be a great alternative to debt. Learn more about HR Consultants UKy, clicking here, and help your employees.
Reflect on your situation
There is no point in following all these tips if you do not reflect on your situation and acknowledge your debts. In fact, this is the initial step to discover the best way to pay off debts.
When you know exactly how much you earn, spend and owe, it becomes easier to devise strategies that are proportional to your reality. As we said in the article, the important thing is not to get discouraged and take action, cutting costs and changing habits.
The worst way for those who have debts is to ignore them and move on, as this is how the person ends up getting into debt, with the so-called “unpayable debts”.
The truth is that unpayable debt, concretely, does not exist and the secret is to negotiate them with your creditor, trying to find the best way to pay off debts.
It may take time, but worse than that is not paying them and compromising your opportunities forever, making you stay in the red all the time.
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