Breaking free from debt is no easy feat, but by making changes that matter you can make strides toward reaching your goals.
Start by tracking your spending. This can help identify areas in which expenses could be reduced without impacting your quality of life, then consider using windfalls such as tax refunds or work bonuses as extra payments on debt.
1. Make a Budget
First step to debt freedom is developing a budget. Begin by listing all monthly expenses (using bank and credit card statements from the last 12 months). When listing expenses, separate fixed from variable costs like rent/mortgage payments; for instance rent may remain stable while groceries, gas and clothing vary over time. It is also essential to take note of debt payments, utilities payments and financial obligations such as emergency savings funds or savings goals.
Compare Your Monthly Expenses To Income. It can be eye-opening and eye-humbling to discover your true spending habits, so comparing these figures may be eye-opening and eye-humbling! If your income exceeds expenses, that is an encouraging sign – time to whistle Kingston Trio’s “Put Your Money Away!” If however your expenses exceed income this indicates more of an issue that requires attention; potentially cutting entertainment, shopping or other miscellaneous costs as these may exceed 90% of income ideally your expenses should not surpass 90% of income!
2. Cut Back on Excessive Spending
Once you’ve created a budget and begun saving money, it’s important to review your spending habits closely. It can be easy to fall into bad spending habits that drain away too much of your savings on things you don’t require while also working to pay down debt simultaneously.
Finding cuts without too much pain may be possible in your budget; such as eating out less or purchasing organic groceries. But first you must establish what are needs vs wants.
One way is by paying in cash; that way you can actually feel your money leave your hand before spending it, which can help curb impulse buys and help keep within your budget. Another approach is using the debt snowball method by paying off smaller balances first as this will give motivation and build your confidence that one day you may live debt-free!
3. Make Extra Payments
Stepping away from debt doesn’t need to be a long and drawn-out process. By setting a plan and sticking with it, you can make significant strides toward eliminating balances.
Set out by creating a budget and allocating an appropriate monthly amount towards paying off debts. From there, reduce unnecessary spending by only buying necessities like groceries, rent and car payments rather than indulgences like new clothing, movie tickets or expensive electronics.
Consider ways you can increase your income. Side gigs, working overtime or starting your own business could all bring in extra funds that you could apply directly towards debts if possible.
4. Use the Debt Snowball Method
If you’re determined to eliminate debt, one effective strategy to use is the Debt Snowball Method. This repayment strategy involves listing all of your unsecured debts (excluding mortgage) in order of size and dedicating any extra funds toward paying off the smallest one first; when that debt has been eliminated, its money goes toward repaying another similar one instead. Once completed, repeat steps 1-6 as necessary until all debts have been cleared off and then spend what was initially designated towards it on paying down its successor debt(s).
This method may not be the cheapest or most efficient way to repay debt (it is less effective than the avalanche method), but it is an effective way to keep yourself motivated and on track toward reaching your goal of debt freedom more quickly. Plus, each debt you pay off provides quick wins to spur progress quickly!
Are you ready to get going? To get you on your journey, use our debt snowball calculator and see how much money you can save with debt snowballing. Plus, set goals and milestones using N26 Spaces app so you stay on the right path during this journey!
