Personal Finance

How to get your debt under control

Getting your debt under control and cleared is important for your mental health and investing potential.

Debt isn’t fun. No one wants to owe money to anyone, but more people today find themselves parting with large sums of their monthly paycheck to clear debts. Looking at how much money you owe may appear daunting, especially if it won’t be cleared until a few years, but there’s an easy method to get a grip on debt.

It should be known that the longer you remain in debt, the more interest you’ll pay in total. This may not seem like a big issue when it’s a small amount per month, but all these charges add up. It’s compounding your debt, which is the opposite of clearing it. Thus, you need to clear it as fast as possible.

This is explained in a truly brilliant way in the form of Debt Snowballing, coined by Dave Ramsey. Here’s how it works:

  1. Calculate your debt total (excluding any mortgages) and separate each credit account. Make a list, starting with the account you owe the least amount on.
  2. Make the minimum monthly repayments allowed on all other accounts. Pour as many spare funds as possible on the smallest debt account.
  3. Once that account is clear, move onto the next smallest account.
  4. Rinse and repeat until debt-free.

Clearing an account in full is better than keeping all accounts open and accumulating interest across the board.

Clearing an account in full is better than keeping all accounts open and accumulating interest across the board. We want to close each account as fast as possible. Getting wrapped up in debt is easy, especially if you run into the five-digit territory, but using this Debt Snowballing method is a great way to bring it under control and feel better about your finances.

Remember: if you’re spending less than you’re bringing in through salaries and other income, your debt level will decrease. And it’s always better to line your own pocket rather than a lender. Just don’t start investing if you already have debts. Your money is far better spent on clearing accounts than sitting in an investment portfolio. That 3% you gain may be countered by the large charges in interest.

Once you’ve cleared everything and have started putting away around 10% of your income to savings (preferably an ISA), it’s time to start looking at ways to make your money work for you. Check out my introduction to dividend investing to see if it’s a good match for you.

By Rich Edmonds

Rich creates content for the top Windows-focused publication, but by night he tries to make his money work for him and rambles far too much here.

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