Overwhelmed with debt

QUESTION: I have a big debt problem and I have several loans. I’ve been trying to pay them, but it has been overwhelming me. What is a good way to pay my huge debt?—Asked via e-mail, name withheld upon request.

Answer: I understand what you are going through—there are many who are in your situation. Truth be told, I also found myself with a huge debt problem in the past so I can understand what you are going through.

The only way for us to be truly debt-free is to pay off our old debt and avoid new ones. Some people who are able to pay off their debt find themselves borrowing again as soon as they have paid their debt. You will find yourself in a devastating debt cycle if you continue this pattern.

What I recommend is for you to go back to basics, revisit your cash flow, spending and create a budget that will generate a surplus. Budgeting is one of the most fundamental processes you need to achieve financial peace.

Review what you spend your money on—our spending is either a need or a want. Start with reducing your wants. Minimize dining out, shopping, spending for entertainment, etc. It is important that you generate surplus, which is what you will need to tackle your debt. Remember, every peso unspent counts, so be faithful with your budgeting. Your discipline in spending will be your biggest defense against debt.

Now that you are able to generate some savings, it’s time to put that extra money to work by getting you out of debt.

The next thing you need to do is a debt inventory. Write down all your debt and arrange them according to amount, from the smallest debt to the largest one. I recommend you try the “snowball” approach to debt, where you will focus paying the smallest one first before moving on to the bigger one. There are many other approaches to debt management, but I find the “snowball” approach to be the most effective.

One of the problems of debt management is what I call “debt payment fatigue”—after paying debt for sometime, people get tired and stop paying their debt. People feel that getting out of debt is an impossible task, despite their efforts, and they give up. The “snowball” effect is both a strategic approach and a motivational one.

Since you started paying your smallest debt, you will pay it very quickly and you will feel some form of accomplishment, which will drive you to move on to your next debt. As you progress, you are actually modifying your behavior unknowingly. You become more focused in getting out of debt and paying more attention to your spending. You also tend to be on the lookout to generate more income.

People who try to pay their multiple debt end up frustrated because, in their minds, they don’t feel any progress even if, technically, there is. Remember to be consistent in paying your debt under the “snowball” approach and, whenever there is a financial windfall like a bonus, try to apply the bulk of it towards the payment of your obligations. The “snowball” approach works, that’s what I did when I had a big debt problem.

Debt is an issue of wisdom: Learn to discern what a good debt and a bad debt is. Good debt allows you to build your assets or improve your cash flow, everything else is bad debt.

Hope this helps.

Randell Tiongson is author of the best-selling book No Nonsense Personal Finance and coauthor of Inquirer’s Money Matters book. To read his blogs, visit www.randelltiongson.com. To learn more about financial planning, attend our FREE personal finance talk on July 31, 7 p.m. at PSE Ortigas. To register, e-mail [email protected] or text <name><e-mail><RFPinfo> at 09173464126.