Getting out of debt is tricky under normal circumstances, but even more so as 2020 exacerbated problems like unemployment, delayed payments, and other barriers to earning and saving money. However, 2021 will hopefully offer a fresh start to save and earn money.
If you're looking to reduce the amount of debt you have and prevent yourself from getting into more debt, we break down how you can tackle different types of debt effectively to help you get that one step closer to financial freedom.
If you're debt is spread across many loans, get a debt consolidation loan
If you've racked up a fair amount of debt in the form of several loans (ie, personal loans, renovation loans, car loans, etc.), you may want to consider a debt consolidation loan. Basically, these loans consolidate your debt into one large loan, thus streamlining your monthly payments into one payment.
They typically last a long period of time (ie, 10 years) with a set interest rate of 3.80 per cent -4.58 per cent per year, making it ideal for those who want lower, long-term payments.
For instance, if you take out a loan of $10,000 for 10 years at 3.80 per cent interest, you can expect your total repayment to be $12,081.10. This could be a much better option than selling assets (i.e. pawning your valuables) for cash or foreclosing on your home.
Debt consolidation is for unsecured credit, and it often excluded specialised loans like renovation or education loans. One of the major advantages of taking a debt consolidation loan is that you do not have to choose a loan based on your existing lenders.
This option is great for those with existing borrowers, but make sure you research before choosing a provider as some will cost more than others in the long run.
If you have a lot of credit card debt, consider a balance transfer loan
Covid-19 and the holiday season might have left your wallet particularly vulnerable this year. If you racked up a credit card bill that you can't before the due date, you may be subject to spiked up interest rates of an average 25 per cent per payment.
To avoid carrying debt well into the new year, you could use a balance transfer loan to consolidate and refinance your debt.
Typically lasting 3, 6, 12, or 18 months, balance transfers will move your debt to one account and charge you initial interest rates of 0 per cent. After a few months, the loans could hike up to a prevailing interest rate similar to those of regular credit cards (around 28 per cent), so it's best to pay it off early.
If your debt is therefore localised to your credit card and you anticipate being able to make monthly payments, this could be a great solution to help you become debt free in the coming year.
ALSO READ: Do's and don'ts of a Debt Consolidation Plan
If you have minor debt, consider cutting costs
It goes without saying that the easiest way to reduce your debt is to cut out frivolous spending. If you owe less than a few thousand dollars, making changes in your day-to-day life could seriously help reduce your debt.
For example, in Singapore there was a 36 per cent increase in ordering food (both from restaurants and grocery stores) since the pandemic began. While it's understandable that you may need nights off from cooking, dining out more than once a week or at expensive places could significantly increase your expenses.
Moreover, if you're paying for monthly subscriptions like Spotify ($9.90) or a gym membership, you could cut costs by listening to YouTube music or using their free exercise videos.
To manage your finances, we've explained the 50-30-20 rule, where 50 per cent of your money should be spent on essentials, 30 per cent on discretionary spending, and 20 per cent put away for savings.
To prevent debt, look for ways to increase your savings
If anything, 2020 has taught us the importance of having built a rainy day fund, and the new year will be a great time to start fresh with your financial planning. Perhaps you've had debt previously and are worried about accumulating it again.
Or, maybe you are worried about falling into debt if you've lost your job due to the pandemic and have bills to pay. Aside from cutting your costs, you can increase your savings by other means.
While financial problems can be stressful, there are ways to focus on your savings to prevent or lessen potential debt. For example, a high-yield savings account or fixed deposit account are accounts that will grow your savings over time with interest.
Additionally, if you have some extra time on your hand, you may want to do part-time work either on- or off-line. While this year was by no means easy for most, with proper planning you can work towards making 2021 as debt-free and stress-free as possible.
This article was first published in ValueChampion.