Greetings, and welcome to the ninth edition of Wallet Wellness in 2024 - your midweek source of practical financial tips to elevate your money management skills!

We hope you had a chance to check out the last edition where we discussed Money Habits Keeping You Poor. Today, we are sharing a six-step process you can use to break free from debt. 

As always, be sure to check out the Concept Corner below for a deep dive into the money concept of the week.

Let’s dive in!

MONEY254 TIP OF THE WEEK

6 Steps to Get Out of Debt in 2024

Accumulating too much debt can undermine your well-being and derail life plans. Oftentimes, mounting debts may make you feel as though you are in a never-ending cycle.

That is not to say that all debt is bad. Good debt is money borrowed to finance an appreciating investment. If managed properly, for example, a loan to start a business, buying new equipment to meet customer demand, and a low-interest mortgage can be highly beneficial.

“Bad debts” are loans that tend to worsen one’s financial situation over time, going from a mild inconvenience to a serious problem. They include racking up credit card debt on non-essentials, taking a car loan for convenience without a stable income, or taking up loans for gambling, vacations, and weddings instead of saving up. Read More.

Whichever kind of loan you have, the relief of clearing the balance and gaining back full control of the money you are earning is something to anticipate highly. And the earlier you can get there, the sooner you can start doing more with your money, debt-free!

Today we will walk with you step by step on how to get out of debt in 2024. The first crucial step is to determine the total amount you owe and develop a plan to pay it off. 

Roll up your sleeves, let’s get to it!

Step 1: List Out All Your Debt Details

This gives you a clear picture of your financial situation. It helps you understand the total amount you owe, the interest rates, and the monthly payments required for each debt. It will also come in handy later when choosing a debt repayment strategy. Read More.

Have a list of all your debt statements and record your debt details such as;

• Creditor: The name of the institution or lender you owe money to.

• Type of Debt: Specify if it's a credit card, student loan, personal loan, logbook, etc.

• Total Amount Owed: The total amount you owe for each debt.

• Interest Rate: The annual interest rate for each debt.

• Minimum Monthly Payment: The minimum amount you are required to pay each month.

• Due Date: The date when the payment is due each month.

This helps to track your progress and update any changes, such as paying off a debt or refinancing. Read More. 

Step 2: Create a Workable Budget

Getting out of debt requires making some changes and adjusting your budget.

• Baseline Budget: Calculate how much you need to spend on all your basic expenses to see where you can free up money. Review this against the total minimum loan payments and allocate your money accordingly.

• Differentiate between "must-have" expenses (needs like housing, insurance, food, and transportation) and "nice-to-have" expenses (wants like entertainment subscriptions or travel) to prioritize spending and manage finances effectively. Read More.

Step 3: Choose a Debt Repayment Strategy

Having a debt repayment strategy helps keep you focused. Consider debt repayment methods such as:

• Debt Snowball Method: Focuses on paying off your smallest debts first, then rolling the payments into larger debts. The reverse snowball method starts with the largest debt.

• Debt Avalanche Method: Prioritises paying off debts with the highest interest rates first. This method can save you money on interest payments over time compared to other methods

• Debt Consolidation: Combines multiple debts into a single loan with a lower interest rate, making it easier to manage with only one monthly payment.

• However, it's crucial to carefully review the terms and fees to ensure it's the right choice for your financial situation. Read More.

Step 4: Pay More Than the Minimum

This is making a payment that exceeds the required minimum monthly payment to accelerate repayment and shorten the period you need to become debt-free. Read More.

• Commit Windfalls to Debt Repayment: Use unexpected or irregular income, such as bonuses, tax refunds, gifts, or inheritances, to pay off existing debts. Instead of spending this extra money, you intentionally allocate it towards reducing your debt balances.

• Cut Expenses, Allocate to Debt: Reduce regular spending on non-essential items or activities and use the money saved to pay off your debts faster. You are essentially freeing up money that would otherwise be spent discretionary to help you get rid of debt. Read More. 

Step 5: Change Debt Enabling Habits

Oftentimes, it is our habits that sink us into debt. While trying to get out of debt, it is necessary that you start auditing your habits and change course. Some of the common debt-enabling habits include: 

• Over-reliance on Mobile Loans: With the popularity of mobile money services, there can be a temptation to borrow frequently using mobile app loans. Though convenient, this can lead to a cycle of debt due to high interest rates.

• Living Beyond Your Means: Overspending to keep up with societal expectations or maintain a certain lifestyle may lead to debt accumulation.

• Lack of Budgeting: Not having a budget or a financial plan can lead to overspending and borrowing to make ends meet.

• Not Having an Emergency Fund: Without savings set aside for emergencies, unexpected expenses such as hospital bills may be covered with loans, leading to debt.

• Using Credit Cards for Everyday Purchases: Relying on credit cards for everyday expenditure without the ability to pay off the balance in full each month can lead to high-interest debt.

Addressing these habits often requires a combination of financial education, budgeting, and financial discipline to promote healthier financial practices. Read More.

Step 6: Prioritize Your Debt

• Pay Debts First. Whether you choose to prioritise high-interest debts to save money on interest payments, or smaller debts for a quick sense of accomplishment, whenever you get paid pay your loan obligations first. Read More.

• Stay Committed to your budget, debt repayment plan, and long-term financial goals. Stay focused on becoming debt-free.

• Don’t forget to budget for your happiness, though: Don’t overcommit your income to debt repayment such that you are left miserable and unmotivated - celebrate your progress! Read More.

Paying off debt will not be exactly easy, but it is worth it in the end. Accumulating bad debts can derail life plans and create a loan dependency cycle that feels endless.

To break free, list all debts, create a budget, and choose a repayment strategy like the snowball or avalanche method. Change habits like over-reliance on loans and living beyond your means. Prioritize debt, stay committed, and celebrate progress. 

CONCEPT CORNER

Debt-to-Income Ratio

Debt-to-income ratio measures your monthly debt payments relative to your gross monthly income, helping assess your ability to manage additional debt. It’s a crucial number to know whenever taking on debt or handling repayments. Learn More

Money Campus

30, Kenyan and Struggling With Debt

Have you ever wondered why escaping the clutches of debt feels like an uphill battle? Debt is not inherently bad; it can be a financial tool that can pave the way to prosperity when managed wisely.

However, it becomes problematic when it starts straining your finances, hindering your progress, and putting you in a debt trap. Many Kenyans in their 30s are knee-deep in debt and struggling to get out, why? Read More.

MONEY254 #MONEYTOK

Fear of Missing Out

Fear of Missing Out (FoMO) is the anxiety of missing out on experiences or opportunities others are having. It can drive impulsive spending to keep up, leading to unplanned debt as people prioritize immediate gratification over financial stability. And it’s real as today’s #MoneyTok Video shows. You can also read a deep-dive article on FoMO here too.

@money254hq

FoMO; Social media has been the biggest contributor to this anxiety in our generation. Pictures and videos we see on social media might so... See more

That's it for the ninth Wallet Wellness edition of 2024! We hope these financial tips have added some energy to your mid-week hustle. Stay tuned for more practical insights in our next edition of "Wallet Wellness" next week and watch out for Money Weekly on your inbox this Friday.

Also, don’t forget to download the Money254 App on the Google Play Store, and remember that we can help you compare over 300 loans, savings accounts, current accounts, and more if you’re thinking about your next product.

Cheers to your wallet's well-being!

Money254 editorial team.