To many of us, debt seems like an inescapable part of life; we work to afford the life we want but our income is sometimes (or often) not enough to cover desired purchases.

When this happens, we take a loan or borrow the money to make a desired purchase immediately and begin the process of repaying the loan. The scenario should end there; No other loans required, and a repayment plan eventually pays the loan off on time, leaving us in a healthy financial situation. The unfortunate reality for many, however, is that this is just the beginning.

The Debt Cycle Begins

For several reasons including poor financial management (especially with credit cards), low income, financial obligations and generally living beyond one’s means, one loan can become many and the borrower ends up in a cycle of debt.

The ‘Debt Cycle’ thus refers to a situation where continual borrowing occurs, leading to increased debt, interest and costs. The debt cycle can be further compounded when new loans are taken, without a strategy, to repay existing loans or keep up with minimum payments. This financial nightmare traps people into a cycle of borrowing and repaying and erodes attempts to gain financial stability.

The debt cycle doesn’t happen overnight. It may take months or years of borrowing before one realises that they are in over their head. At that point however, it is likely to be difficult to regain sound financial footing. That said, it is not impossible.

Breaking the Debt Cycle

To break the debt cycle, we need to get a better understanding of what leads to the cycle itself. As previously mentioned, there are several contributing factors, such as:

Lack of General Budgeting and Saving – Without a proper analysis of our income and spending, including putting aside money for emergencies, it is very easy to spend more than we should, which leads to borrowing. Unexpected and unplanned-for expenses ironically frequently occur and yet are seldom budgeted for.

Lack of financial training – Our parents and teachers may not have had training on managing finances and have thus passed on their bad habits of poor financial management to us, without our realisation that there are better ways.

Liming/Partying Habits – Liming and partying are parts of our culture that offer stress relief and euphoria but also require constant funding. Without proper budgeting, our desire to party every weekend often leads to a depletion of funds, as parties often cost more than just the ticket price.

Keeping Up Appearances - Our desire to maintain the appearance of a certain lifestyle even if our financial situation has worsened (either through lessened income or increased expenses) is one of the fastest ways to get into debt.

With the awareness of some common causes of debt, breaking the cycle becomes a little easier. There are a few steps to do this, which, along with patience and determination, can help bring financial stabilisation.

Knowing what is owed and having a plan – One of the first steps is understanding the totality of what is owed and due dates for payments. Following this, you can develop a plan to pay off loans that may look at tackling the ones with highest interest first (debt avalanche method) or the smallest loans (debt snowball method) first.

Track spending / Budgeting – Spend an average month tracking all your expenses and build a budget based on such. This will allow you to determine which expenses can be reduced easily (e.g. cutting out one or two liming nights) and what money can then be diverted towards loan repayment.

Cutting Costs – Spending less on frequent purchases results in more money to repay loans. While this ‘banning your belly’ situation may be painful, it is temporary and for your greater benefit.

Separating your wants and needs – We often spend without thinking about whether our expenses are necessary. If you’re thinking about a purchase, consider whether it’s a necessity or something nice to have. If it’s the latter, that money can be better used in paying off debt. Necessity items such as a phone or car can be further scrutinized; while you may need these, you may not need the latest, most expensive models.

Debt consolidation – It may seem counterintuitive but taking a loan that consolidates your debt can be a very useful tool. This additional personal loan can “combine” multiple debts, such as a credit card and car loan, into a single larger debt with more favourable repayment terms, giving you a better chance at repayment.