There are various reasons people get in debt. It could be poor planning, an emergency, buying shiny toys like nice cars, investment, buying a home, living beyond one’s means, too much responsibility, etc. With my new found knowledge I don’t see any valid reason for getting into debt. Of course we all have different life circumstances and we may find ourselves in a deep financial hole.
But how do you get out of this hole?
1. First you MUST realize you are in a hole and it is NOT a lot of fun being in a hole. This is probably the hardest part. You have to stop digging the hole immediately. This means that you MUST decide immediately to stop borrowing any more money. No more getting sugar from the shop on credit. No more salary advances. No more bank loans. What do you do when you grab something hot. You immediately drop it. You don’t try to check the temperature of the hot item. You just drop it!
2. Next you need to start immediately to save some money. Start by saving at least 1m shillings. This money can only be touched in cases of real emergencies. Going out for a drink is NOT an emergency. Building a house is NOT an emergency. School fees is NOT an emergency. Having the 1m cash float allows you to manage any small emergencies without resorting to borrowing. Of course this amount can be much larger depending on your situation.
3. The debt Snow Ball. After you have saved at least 1m shillings you now need to start paying off the debts. List all your debts from smallest to largest. Make minimum payments on all your debts except the smallest. Pay off the smallest debt first. Pay as much as possible on your smallest debt. Pay off the 20k you owe the maid. Then pay off the 100k you owe at the bar. Then pay off the 500k you owe to a friend. Then pay off the bank loans. Each time you pay off a loan the amount available to clear the bigger loans increases. Simply take that amount and add it towards the next debt.
4. Repeat this process until all debts are cleared. This may take several years but it can be done. And of course it will be painful.
5. Commit to get out of debt no matter what. Downgrade your lifestyle. Sell old stuff on Olx. Use Uber instead of your car. Stop eating out. Cancel DSTV subscription. Sell your car and pay off the money lender. Become unreasonable and totally obsessed. Be like a crazy person and FOCUS to get out of debt. You may be scorned by your friends and family. Simply press on!
Like Dave Ramsey says the debt snowball works because it’s all about behavior modification. When you ditch the smallest debt first, you see progress—quickly! You have hope! That debt is out of your life forever. The second debt will soon follow and then the next. When you see the plan working you’re more likely to feel like you can stick it out.
And when you keep at it, you’ll succeed in becoming debt-free! By the time you’re paying on the bigger debts, you have so much cash freed up from paying off the earlier ones that it creates a debt snowball. Suddenly, you’re putting hundreds of thousands of shillings a month toward your debts instead of slowly chipping away at them with minimum payments.
You build momentum, and that changes your behavior and helps you get out of debt for good.