How to Break Out of the Debt Cycle – A Simple Guide

Loaning money to get out of a difficult financial situation can sometimes be the best option, but it can easily set the pace to a continuous debt cycle, especially if you end up borrowing more than you can pay back. Having a credit card and even a small loan can seem like no problem, but when you end up borrowing from one party to pay the other, you may want to consider some lifestyle changes to get you out of this continuous borrowing loop. The following guide was put together to help you get out of financial trouble, avoid bankruptcy and stay on the right track to financial success.

What Is A Debt Cycle?

A debt cycle can be translated into continuously borrowing money from one or multiple sources to pay off other debts or keep up with monthly payments. This can lead to bigger debts, bigger interest rates and financial failure. By continuing to borrow money, you will end up spending more than you produce and this will lead to financial struggle and eventually bankruptcy. Many people choose to take out loans to pay off other existing loans, as it can seem like the last resort but end up paying more interest costs than their monthly income. Taking out a loan to invest in your educational or business future can be a good idea, but taking out money just to support an unhealthy spending habit may not be the right decision.

Getting Out of the Loop

Admitting you are experiencing some financial trouble is the first step to recovery. Don’t be too hard on yourself, by spending too much time questioning your past financial decisions. What’s done is done and, instead of losing more time overthinking, it might be best to start thinking about solutions to get you out of the current situation:

  • Review your budget

In order to begin solving your financial issues, you will first have to understand where do all your money go. You will need to sit down with a pen and paper and start writing down your income and spending. Take some time to make sure you don’t miss anything, as you will need to have a realistic view of the situation. On a column, write down all your reliable income and add up the amounts. On another column, write down all your mandatory monthly expenses, like rent, groceries, utilities and bank payments. After adding up the amounts here as well, subtract it from your income and write down the number. Your expenses should never exceed your income and if this happens, you will have to cut down on some expenses. Take a look at the list and see where you can adjust it. You may have to cut down on something you want, but don’t actually need, in order to even out the numbers.

  • Make changes in your lifestyle

In order to pay out of debt, you may have to make some drastic changes in your lifestyle and cut down all unnecessary spending. If you usually eat out in your lunch break, preparing your meal from home might save you some money. Consider walking, taking the bike or using public transportation to get around town and use your car only when extremely necessary. Don’t expect this to be easy and avoid doing it all at once, as you may feel a bit overwhelmed by the changes.

  • Avoid other loans

Sure, taking out more money to cover up your existing debts can seem like a good option, but it will get you right back where you started and possibly set you up for more trouble. Don’t get into more debt before you can afford to pay off what you already owe.

  • Consider financial advice

If, even after making some drastic changes in your lifestyle, you still can’t seem to manage your finances, it may be time to consider seeking some financial advice. A financial counsellor might offer you some option you didn’t think of before, like getting an individual voluntary agreement (IVA). If you are struggling with council tax debt, this might be the best option for you. Besides bankruptcy, an IVA is the only way to write off council tax debt. IVAs allow you to pay back a chunk of your debts, over a period of five years. At the end of this period, the rest of your debt will be written off. Although it sounds easy in theory, there are more things to keep in mind, before considering IVA. For example, IVA can not be used to pay off student loans, child support or court fines. Your loans need to exceed a particular amount in order to apply for an IVA and you will have to prove you have a stable income to sustain the plan built up by the Insolvency Practitioner.

Out of Debt- Now What?

Getting out of debt was surely not an easy process. Once you’re finally out, make sure you remain on this path and don’t fall back into old habits. It’s important to maintain a financial plan that will help you reach your goals and start saving some money. Don’t stop budgeting, even though you might feel it doesn’t have to be that strict now. Allow yourself to spend a bit more on some categories now, but make sure your expenses don’t exceed your income.

After finally paying off your debt, it’s time to start saving some money and build an emergency fund. This fund will help you in extreme situations, where you would normally start thinking about borrowing money, like job loss or medical emergencies.

Now that you are financially stable, you may want to consider setting up bigger goals. Maybe you want to buy a car or a house or open a business.  Now it’s time to start moving towards these goals and plan ahead for your future. When paying off your debts, you got used to spending a lot less money and maybe even realized there are some things you don’t actually need, but were just whims and you can live without them. Use the money you typically spent on these things and direct them towards a savings account. Talking out to a financial advisor and considering investing money into some mutual funds might also be a good idea.