How to Get Out of Debt Faster

Being a financial advisor for more than a decade, I’ve met a lot of people who have debts ranging from thousands to even millions of pesos. And while there are those who can get out of debt in 2-3 months, there are some who are having a hard time paying theirs even after 2-3 years.

It’s a given that there are different factors to consider, like the amount of debt, how much a person earns, and the type of debt a person has. But aside from these, one thing that each person may differ from another is how they prioritize their spending.

It’s important to note that each of us has our own journey when it comes to money. And it cannot be avoided that there are instances where people have to rely on borrowing money from others. With 2023 coming to an end, this is a great opportunity to reflect on our finances and get a fresh start by prioritizing paying off debts.

With that said, I’d like to share with you how to prioritize your spending in a way that will help you get out of debt faster. And this is what we call the hierarchy of debt-free spending.

The Hierarchy of Debt-free Spending

1. Direct income Growth 

   The first thing to prioritize is raising our salary or adding another source of income. And sometimes, we have to spend money to help us improve it. This can be in the form of certifications, courses, workshops, masterclasses, etc. We have to learn ways of how to earn more because this directly affects how you can pay off your debts immediately.

   Let’s say you earn PHP 220,000 a month. And you can only set aside PHP 25,000 to pay for your debt of PHP 900,000. It’ll take you 36 months or 3 years in order to pay it off. But if you’ll be able to raise your income to PHP PHP 270,000 and save PHP 7575,000 per month this time, then it’ll only take you 122 months or just 1 year.

   So this is the reason why it should be the first priority. Not being able to raise the amount of what you earn will slow you down.

2. Basic Survival Needs 

   Now, next in line are our basic needs like food, rent, transportation, electricity, and water. What do we need in order to survive from day to day?

   We have to define exactly what those are and understand that they're a lot different from the things that we want. It may not give us much comfort at the moment, but it’s enough for us to live our daily lives.

3. High Interest Loans 

   This is the type of loan that needs to be prioritized the most. When left unpaid, this can grow to a huge amount that can make anyone have a harder time paying it off.

   An example of this is a payday loan. For those who are not familiar, it is where you borrow money with the condition of repaying it when the next payday comes. But this type of loan often comes with a high interest rate, like 1% per day. Imagine having to pay an interest rate of 15% in just 15 days, or on a year scale, that’s 365%!

   For comparison, a house loan interest rate in the Philippines can range from 6 to 10% per year. Compare this to the 365% per year of a payday loan. That’s a huge difference, so it’s important to pay this kind of loan first.

4. 1-month Emergency Fund 

   It’s easy to get trapped in the cycle of borrowing money, paying it, and having to borrow again. That’s why this is important to build because, in case an emergency happens, you won’t have to take out another loan for it.

   For anyone who is trying to get out of debt, it is frustrating to be stuck in that loop. And this frustration can slow you down even further.

5. Sanity Spending and Credit Cards 

   These two are on the same level, which means you pay off your credit cards while also spending some money to improve your sanity or mental health.

   Paying off debts, especially huge ones, can take a lot of toll on a person since it often requires sacrifices. That’s why it’s important that you spend a small portion of your income for yourself after you build your 1-month emergency fund.

   An example of this is eating out at your favorite restaurant. This may not be as grand as going abroad and taking a vacation, but this means you’ve used your hard-earned money for something you want, not just need.

6. 3-month Emergency Fund 

   Since you’ve now paid off your credit cards and you’re spending for yourself maybe twice a month to improve your mental health, it’s time to increase your emergency funds.

   Having more emergency funds can help you at times of need or unexpected expenses. This way, you have more buffer for your budget and do not have to immediately rely on borrowing money.

7.  Insurance, Healthcare, and Comfort Spending 

   After you pay off your high-interest loans and credit cards and save a 3-month emergency fund, these three come in. First is basic life insurance so that you are protected, and if you suddenly pass away, your loved ones won’t have to borrow money as well.

   Next is healthcare. If your employer doesn’t provide it, it’s important to get one for yourself. This can save you from the bills that you may incur if you get sick and are admitted to a hospital.

   Then the third one is comfort spending, wherein you can now spend more for yourself or your loved ones, like a movie date with friends or a date night with your spouse. Again, these three are on the same level of prioritization.

8. Car Loan, Home Loan, and Medium-term Investments 

   Now, the next level here is to pay off your home and car loans, if you have them. While doing so, you can also make some medium-term investments. Medium-term means this will be good for you in the next 5 to 10 years.

9. Long-term Investments

   Last but not least, you can now avail of long-term investments. This means it’s for the next 10 years or more. This can be for your retirement, your kid’s college tuition, or even your dream business.

And that’s it! This is how anyone should prioritize their spending if they want to get out of debt faster. If you feel like what you earn is not enough, then this means you skipped growing your income. It may sound hard for some, but remember that there’s a limit if you choose to just save as much as you can. Unlike when you grow your income, the possibilities here are endless.

Now, chances are this journey will not be a smooth ride. But my goal for you is to steer you in the right direction and help you improve your financial situation. This is why here are 3 simple reminders to keep in mind.

Reminders for Your Debt-free Spending

• Follow the hierarchy and be disciplined about it.
  For example, if you still have credit card debt, don’t skip it and get a long-term investment right away. Or don’t get life insurance without building your emergency fund first. Stick to following the hierarchy to get out of debt faster.
• Avoid comparing your journey to anyone else’s.
  Each one of us has our own unique situation. And as mentioned, there are various factors at play. Don’t be too hard on yourself, and know that you’ll get past this.
• Don’t be afraid to ask for help.
  You can ask for referrals for opportunities where you can grow your income. There are people out there who are willing to help. Don’t hesitate to give it a try.

And lastly, if you’re confused or overwhelmed with how things are going, it’s okay to ask for guidance. Seek professional advice by reaching out to your trusted financial advisor. If you don’t have one yet, you can send me a message here.