Break the Cycle: 7 Simple Ways to Dig Your Way Out of Debt

Debt is a double-edged sword. You can borrow money and invest, or even pay your high-interest loans. But when you don’t pay your debts, it can take away your financial freedom. 

Worst of all, you can get into the dreaded debt cycle. When you’re in a debt cycle you fall behind your financial obligations, and fall further into debt. This forces you to live from paycheck to paycheck because you have little or no savings.

Getting out of debt can feel like an unachievable pipe dream. Thankfully,  there is a way out! Here are some simple ways to step out of debt for good.

Read Also: Why Debt is Good For You

1. Know Your Debt-to-income Ratio

Debt-to-income (DTI) ratio refers to the percentage of your gross monthly debt repayments. In simple terms, it's all your monthly debt payment divided by your gross monthly income.

Knowing your DTI is important because it reflects your financial health. Besides, lenders use it to measure how much you can borrow. 

To find out your DTI, you need to calculate it.

How to calculate your debt to income ratio

Calculations make most people develop cold feet. Don’t fret though. This will be a simple arithmetic operation involving only 3 steps.

Step 1: Add up your monthly gross income. 

Step 2: Add up your monthly debts

Step 3: Divide your monthly debts by your monthly gross income.

Here’s an example;

Gross monthly income: Ksh90,000

Primary job: Ksh70,000

Side hustle: Ksh20,000:

Gross monthly debt: Ksh30,000

Sacco loan: Ksh20,000

Helb loan: Ksh10,000

Debt to Income calculation

1. Divide your total monthly debt by your gross monthly income

30,000/90000 = 0.33

Multiply the result by 100 to get the percentage.

0.33 x 100 = 33%

Always keep your debt-to-income ratio as low as possible. Generally, below 35%. You can lower it either by increasing your sources of income or lowering your debt.

Read Also: 5 Tips to Mastering the Art of Debt-Free Living

2. Create a Budget and Cut Spending

Budgeting can help you crawl out of that debt hole, especially if your debt is due to overspending. When you create a  budget, you can identify items you’re wasting money on and cut them from your spending.

So, review your daily expenditure to find what to cut out. For example, you may need to move to a cheaper house or stop ordering in or eating out.

As you review your spending, look out for

• Impulsive spending.
• Unused subscription services.
• Late fees from missed debt payments.
• Overdraft fees.

After cutting down your expenditures, use the saved money to repay your debts. You’ll be surprised by how fast you’ll clear your debts.

Read also: How to Budget and Save a Lot of Money as An Employee

3. Set up a Plan to Pay Your Debts

Now that you're living within a budget, it’s time to create a debt repayment plan. A good plan will keep you on track and prevent you from falling further into debt.

Two of the most popular debt repayment methods are the debt avalanche and debt snowball methods. Both of these methods suggest tackling one debt at a time

With the avalanche approach, you pay the minimum payment on all debts and then use any extra funds to pay off debt with the highest interest.

On the other hand, the debt snowball method suggests making minimum payments on all debts and then focusing on paying the small loans first. After paying the smallest debt, you take what you were paying and roll into the second debt. 

If you’re wondering how to set up your debt repayment plan, follow these easy steps.

1. Make a list of all your debts. You should include the minimum payment amount, the interest rate, and how much you owe.
2. Rank your debts in the order you want to pay them off.
3. Look for extra money to pay your debts. You can explore selling items you don’t need or starting a side gig.
4. Focus on paying the first debt on your list.
5. Move on to the next debt on your list.
6. Focus on building savings and cutting back on unnecessary expenses.

Read also: 10 Warning Signs You’re Living Beyond Your Means

4. Adopt a Frugal Lifestyle

Living a frugal lifestyle will help you get a grip on your finances. This is because you’ll spend less and save more for your future. 

If you’re looking to adopt a frugal lifestyle, here are a few frugal living ideas:

1. Consider downsizing your house. Just because you can afford an expensive apartment doesn’t mean you need it.
2. Eat out less.
3. Take advantage of coupons and discounts.
4. Travel during the off-season.
5. Cancel magazine and newspaper subscriptions.

However, a frugal or minimalistic lifestyle doesn’t mean giving up on everything. Give yourself a good treat once in a while. 

To live a frugal lifestyle seamlessly,  keep in mind the following rules.

1. Stop accumulating more debt
2. Live below your means
3. Choose quality over price
4. Understand the difference between wants and needs.
5. Consider lifestyle changes

More learning: 13 Tips to Live Cheaply But Don’t Look Cheap

5. Pay More than the Minimum

When repaying your debts, make sure you’re paying more than the minimum monthly payments. If you’re only making the minimum payment, it can take forever to clear the debt. This is because most of what you pay will go towards paying the interest rather than reducing what you owe.

Let’s say you have a Ksh100,000 bank loan and a Ksh10,000 minimum monthly payment. If you only make the minimum payment, it will take you 10 months to repay the balance. But if you paid at least Ksh15,000 per month, you could repay the loan in 7 months.

Even an extra Ksh1000 or Ksh2000 can make a difference. But more is better since you’ll clear your debts faster. 

5. Look for Extra Income Sources

Earning extra income allows you to bump up your monthly payments. The more income you earn the easier it will be to repay your debts.

You can increase your sources of income by;

• Getting a part-time job such as tutoring, drop shipping,  and freelance gigs.
• Selling items you no longer use on sites such as Jiji
• Leasing your space and belonging

Any extra income you generate will push you closer to debt freedom.

6. Commit Windfalls to Debt

Windfalls can help you get debt-free. A windfall is an income that is sudden and unexpected. Examples include work bonuses,  lottery wins, inheritance and cash gifts.

You could commit the entire windfall or split it between repaying your debts and other expenditures.

When you use windfalls to pay off debt, you’ll build momentum and clear your debt faster. If you get a pay raise, you can also use it to accelerate your debt repayment.

Read also: 5 Things to Do When You Get a Salary Raise

7. Build an Emergency Fund

Stashing emergency funds in a high-yield savings account can help you break the debt cycle. Although it may seem counterintuitive, you won’t have to borrow and get further into debt when an emergency occurs.

Experts suggest keeping 3 to 6 months of your expenses in an emergency fund. Although this might seem like a tall order, start small. As they say ‘Haba na haba hujaza kibaba”

After funding your emergency account and getting out of the debt cycle, consider other financial goals such as saving for retirement. 

If your debt still feels overwhelming, you don’t have to deal with it alone. Consider getting professional financial help.

Read also: 6 Consequences of Not Having an Emergency Fund

Wrapping Up

It can be an uphill task to break the chains of debt bondage. However, if you follow the steps we’ve discussed, you can crawl out of debt and improve your overall financial health. 

That said, getting out of the debt cycle requires plenty of patience. Stick with whatever approach works for you.