How to pay off debts faster? 5 effective steps from a financial advisor

It is known that debt is worth paying off. But many times in life, people take out loans to pay off past loans. At first glance, our actions seem reasonable to us, but deep down we understand that there is some kind of error in the algorithm of our actions that does not allow us to get out of the vicious circle.

Today, one third of Russians have credit. 15 percent of the population uses credit cards. The average borrower’s debt on unsecured consumer loans is about one million rubles. Debts interfere, oppress and hinder capital formation.

Is it true that even in a crisis you can not only save but also increase your wealth? How to improve financial literacy? How do you distribute your salary so you don’t have to worry about rice? How can you pay off your debts early if you have too much credit? What steps will help you optimize your spending?

Alexey Rodin, financial advisor and founder of family finance agency InvestArt advisors, answered these questions exclusively for The Fashion Vibes and gave recommendations on how to get rid of the debt burden simply and effectively.

By the way, we have previously written about why we make impulsive purchases and what the “Diderot effect” has to do with it.

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Step 1. Determine why you need to be debt-free

Unexpectedly, this is a preliminary and perhaps the most important step that will give motivation to move forward and indicate the final point of the path. Without motivation, it is difficult to maintain rhythm, and without understanding the end point, it is impossible to build the path to it. Imagine your future life and ask yourself these questions:

– How will I feel when I get rid of debt?

– How will my life change?

– What is important to me and what do I want?

Each of us has the same goal; to be happy and everyone has their own criteria for happiness. Some people need a home on the ocean, some want to travel. And almost all criteria are tied to money, so the financial goal is to create capital. Determine what capital you need and why and write it down.

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Step 2. Understand where money goes and optimize expenses

We can’t control what we can’t control. And at this stage it is necessary to control costs. And here the most important thing is to avoid unnecessary expenses. Sometimes we spend according to emotions, on the advice of officials or under advertising pressure, these expenses are unnecessary, they can take up 10-20% of the budget. And there are two life hacks to avoid such expenses:

Before any purchase, ask yourself three simple questions:

— Do I need this specific product or can I reach my goal at a different price?

— Do I really need such a product at this price?

— Can I buy it cheaper?

Give yourself time to think before making any purchases.

For example, when buying up to 1,000 rubles, be sure to think for 15 minutes.

5,000 rubles – hour.

10,000 rubles – 5 hours.

30,000 rubles – per day.

50,000 steers per week.

100,000 rubles – month.

Each purchase will have its own time frame to consider. These depend on your abilities and awareness. This approach will allow you to control spending by removing emotions from spending.

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Step 3. Keep records and analyze assets and liabilities

Do you have all the information about them in your head? If your answer is yes, you can probably answer these questions yourself:

— How much money was in your bank account at the beginning of the month?

— What is the return on the deposit, taking into account capitalization (Adding the accrued interest to the principal amount of the deposit – Ed.)?

— When exactly is each loan due?

— How much is the debt for each loan as of the first day of the current month?

List all assets:

An apartment, a car, money in a bank account, securities at a broker. Specify profitability or maintenance costs for each asset. Don’t forget taxes and insurance.

Now ask yourself three questions for each entity:

— Do I really need this asset?

– For what purpose do I keep it?

— Could the asset perform better, or would it be wiser to sell it and invest the money more efficiently?

Perhaps your financial safety net lies in an interest-free current account. Or you bought some stocks and don’t understand why or what to do with them.

Write down all debits and credits:

Mortgage, consumer loan, credit card. State the interest on the loan, the monthly payment, the remaining debt, and the final overpayment on the loan. Watch out for future overpayments on each loan. Influential? This is the money you give to the bank that can go towards the financial goal you stated in the initial recommendation.

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Step 4: Develop an early debt repayment plan

If you followed the second advice, you would have 10-20% “extra” money. So you’ll need them to pay off your debts quickly. There are two technologies for early repayment. One is more economically profitable, the other is more psychologically convenient.

snow avalanche

This method is aimed at the patient. It is economically beneficial. Action plan:

— Distribute loans by decreasing the interest rate from high to low.

– Put all your energy into paying off a more expensive loan. Every free ruble found from previous recommendations.

— Then pay off your next loan early.

You’ll save more in the long run because you’ll reduce overpayments by paying off expensive loans early.

Snowball

The method is suitable for those who want to see results quickly. It is psychologically comfortable. Action plan:

— Distribute the loans from smallest to largest according to the increasing debt balance.

— Devote all your energy to paying off your debt with minimum debt. Use every free ruble to pay.

— Pay off your next loan early. You will see the result quite quickly. If you pay off the first, smallest loan, more free money will appear to pay off the next loan, which means your motivation to continue will increase.

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Step 5. Improve financial literacy

Finally, don’t neglect financial information. Yes, it’s not always obvious enough, but in some cases you don’t need an economics degree to save money. It’s just important to keep your nose out of the wind: Be curious, don’t be afraid to ask questions to those who understand cash flows better than you, and consciously spend time searching for the right thematic channels and articles. In most cases, people are hindered by laziness and fear of failure. Don’t be afraid to be stupid: all knowledge is valuable. The biggest mistake is passively hoping someone will do something for you. Luck, including financial success, accompanies those who try to solve and put in order their financial affairs themselves.

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Important points

– Since we pay the bank interest first and then the principal debt, it is more profitable to pay the mortgage loan early in the first half of the term. Using the conditional monthly payment example: in the first months of the mortgage, 5% of the payment is principal repayment and 95% is interest; In the last months of the mortgage loan, 95% of the payment is principal refund and 5% is interest.

– If you have money for early repayment of the mortgage, it would be more profitable to use half of it for early repayment, shorten the mortgage term, and send the other half to the investment portfolio, instead of repaying the debt faster. Then you will quickly pay off your mortgage and accumulate capital.

– Taking out a new loan to pay off existing debts means getting deeper into a hole from which there is no way out. If the Central Bank’s key interest rate drops, restructure the loan by lowering the interest rate. This will reduce your monthly payments and future overpayments. Use all your free money to pay off your debts early.

Congratulations. You are now more financially literate than 70% of the population. You have a strategy, you have a goal, you have an understanding of why you need to move forward. Now you manage money consciously, do not spend it on emotions to the right and left, control it and you can manage it. We are proud!