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How to become debt free

Is your debt mounting up and causing you sleepless nights? Take heart, you’re not alone. A good number of us have been through this at some point of our lives, but the good news is you can work your way out of it with focus and determination. And you can start right now.


Are you ready to: 1) confront the problem? 2) change the habits that got you into debt to begin with?


If your answer is yes to both those questions, you’re in good company. Read on.


Confront your debt

Face it. Head on. Calculate how much debt you have. Credit cards, loans, money you might have borrowed from friends or unofficial lenders. Add it all up. This number is your total debt.


Now, calculate your debt income ratio. This is your total debt divided by your total income.


Example 1: You earn AED 100,000 annually, and your debt is AED 50,000. Your debt income ratio is 0.5.


Example 2: You earn AED 100,000 annually and your debt is AED 200,000. Your debt income ratio is 2.


Example 1 is good; Example 2 is not. A debt income ratio should always be below 0.5. In other words, your debt should not be more than 50% of your income at any given time. You should also know that the UAE Central Bank will not allow you any more credit if your debt income ratio is above 0.5.


So, let’s assume Example 1 is not where you are. You have work to do.


Change your habits

What spending habits have got you here to begin with? Do you spend more than you earn? Are you in the habit of taking loans for holidays, gadgets, or other things you can’t yet afford? Or perhaps you give into impulse buys and have racked up a huge credit card bill and can now only afford the minimum payments every month?


It doesn’t always have to be bad spending habits that land you in debt. I once knew someone who paid big medical bills for their parents and ended up in massive debt, paying only the minimum amount every month as the debt and interest piled up. There’s help at hand.


Let’s look at a few things you can start doing right away:


Avoid new debt. Stop spending on all non-essentials. Right now.


Pay more than the minimum payment.Remember, you’re paying interest on your credit card debt and this can snowball exponentially. So, pay more than just the minimum amount every month and your debt will start reducing.


Pay off your smaller debts first. Make a list of your debts and throw all your extra cash at your smaller debts one at a time. Do this consistently and you will see progress every month as you work your way up the list.


Earn more. Look around. Part-time gigs can help pay off debt. Or perhaps you can negotiate better terms with your employer? It won’t hurt to try.


Downsize your home. There are better deals in the market right now with rents dropping. Consider moving. Or better still, arrange to stay with family or friends until your debt is paid off.


Sell stuff you don’t need. Minimalism is not just good for your finances, it’s good for the soul! Sell things you don’t use anymore and use the money to pay off some debt. If you drive a car, consider selling it and using public transport for a while. You will save all car-related costs – insurance, fuel, maintenance, you name it. If you still have a car loan, that’s one debt less already.


Ask someone you trust if they can extend you an interest-free loan. Family and friends can be good sources of interest-free funds. Tap them. Use the money to clear your loans, but be sure you pay the person back faithfully every month.


Talk to your bank. There is a lot your bank can do to help. Most banks have some solutions to help you manage your debt better. Reach out to them and see what they can do.


Good luck and keep us posted!