How To Pay Off Debt And Build Credit For A Happier Life
How to Pay Off Debt and Build Credit for a Happier Life
Living a life of debt is almost a common lifestyle to most people, despite the fact that no one really wants to be associated with such a life. As you can expect, the effects of debt are mostly negative and are even capable of damaging your health, career, and relationships.
The main reason why paying your debt is important is because it gives you peace of mind and gives you better control of your finances so that you are not always finding a way to evade your creditors. In addition to that, you will enjoy the following benefits:
Be a respected man
Improve your credit score
Own your assets
Increase your future income
Enjoy better mental health
You can spend more freely without feeling guilty
Stronger relationships with the people that are close to you
Besides, with low or no debt at all, your creditors will respect you because you have the tendency to keep your word whenever you’ve secured a loan from them.
How to take better control of your debts
One of the most important things that you can do as part of your effort to get out of debt is to make a list of all the debt that you have and to whom you owe it. Your list of debt should include the creditor’s names, the amount of money that you owe each creditor, interest rate, your monthly payment for each debt, and the due date.
If you are afraid that there are some debts that you don’t know about, be sure to check your credit card file for a clearer picture. The information on your credit file will make it easier for you to know who you owe money to and whether you’ve got any defaults. A complete list of all your debt and who you owe them to can make it easier to come up with a payment plan.
Remember to update your list as your debt changes as you will feel motivated to clear the remaining debts when you see your total debt amount reducing gradually.
Calculating your income salary and salary that varies with a commission
You have to get a clear picture of how much you earn each month, to make it easier to come up with a payment plan. If you have only one job with a fixed monthly income, you’re good to go. For those who earn a commission-based income or income from different sources, you would have to make some simple calculations.
If you earn a fixed income from different sources, all you have to do is add the different monthly incomes to determine your gross income. For commission-based incomes, however, you may have to calculate your income depending on the sale you make.
There are three main types of commission models that are used by employers, as discussed below:
1. Straight commission:
Here, your total income is purely based on your sales for that month. The calculations are as follows:
Sales x Commission Rate = Income
2. Base plus commission:
For this model, you earn a base salary and a sales commission income on top of that. Here is how to calculate your total income for a specific month while on a base plus commission agreement with your employer:
Base Salary + (Sales x Commission Rate) = Income
3. Draw against commission:
This model includes an advance payment that you get from your employer as a loan. You can pay back the loan, or have it subtracted from your income after making sales. The calculations for this model are as follows:
(Sales x Commission Rate) – Advance Pay = Income
Once you’ve determined your gross salary, you can deduct the applicable taxes and other charges to get the net salary, which is the amount that you will now use to make your debt repayment plan.
Calculating the 20% formula to pay your debts after paying yourself
The pay-yourself-first is a budgeting strategy that focuses on saving goals rather than fixed and variable expenses. This strategy prioritizes saving, though not at the expense of important expenditures such as housing.
The pay-yourself-first strategy is based on a 50/30/20 formula. With this formula, you should allocate 20% of your total monthly income to debt repayment and saving, 30% to wants, and the final 50% to necessities.
How to avoid slipping back into debt
No one really wants to get in debt. It’s just one of the things that happen without giving you much control. However, you can stay out of debt if you want, by doing a couple of things. Some of the things that give you better control of your finances and make it possible to stay out of debt include:
Let the principle “If you can’t afford it, don’t buy it” guide you always
Reduce your wants and focus more on the needs
Track your income and expenses with a good budget
Stick to your budget without fail
Avoid borrowing for unnecessary or risky expenditure such as get-rich-quick schemes
Avoid using your credit card for cash advances
Strive to clear your credit card balances in full at all times
Reduce the number of credit cards that you own
Find ways to earn more money
In summary,
You can come out of debt and lead a normal life if you are keen enough. With the information given in this article, you should be better placed to get out of debt and enjoy the benefits of a debt-free life. Remember that the main secret to having better control of your finances is to be disciplined when it comes to spending what you have earned.
