Tracking your spending is key to becoming debt-free, whether or not you live a cash lifestyle. Saving money through budgeting, negotiating lower prices or forgoing unnecessary expenses can yield sizable savings that add up over time.
Debt snowball and debt avalanche methods are two popular approaches to paying off debt, both designed to save interest. Each method works differently; ultimately it’s up to you and your situation to decide which method will work best.
1. Reduce your expenses
Millions of people have found the freedom of freedom from debt through getting out. Doing so involves changing spending habits, tracking expenses and prioritizing debts as well as setting financial goals and creating emergency savings funds – as well as cutting unnecessary expenses.
Cutting costs is most easily accomplished by eliminating unnecessary spending, like buying lunch at work instead of making your own coffee brew. Small costs add up quickly!
One way to reduce expenses is by creating a budget. Start by writing down all of your monthly expenses on a list and analyzing them to see where you can cut back – for instance if you have multiple gym memberships that go unused cancel one and put that money toward debt payment instead.
2. Track your spending
Millions of people are in debt, yet getting out is possible if you change your spending habits, budget effectively and prioritize debt payments.
One way to stick to a budget is to use cash instead of cards. Doing this will help prevent overspending as you’ll actually witness money leaving your hands and thus more easily adhere to a spending limit.
Another tip for saving is shopping with a list. Doing this can help prevent impulse buys that add up over time. Also consider splitting living costs among roommates to save on rent, utilities and food costs.
A popular method of paying off debt is the debt snowball method, which prioritizes each debt by size before starting with the smallest debt and repaying them all over time.
3. Get a part-time job
If your current income won’t cover all your debt balances, finding additional sources of revenue might help. From dog walking and part-time gigs to freelance writing work and freelance photography jobs, extra take-home pay could allow more room in your budget for non-essentials while helping reduce debt faster.
Not everyone needs or can benefit from working more, however. In such instances, consider other strategies such as cutting expenses or using the debt snowball strategy to decrease debt payments. You could also increase current income through asking for raises, switching jobs or freelance work; just remember to set aside any extra money towards debt payoff goals to make sure it goes towards worthwhile causes.
4. Consolidate your debt
Debt consolidation is the practice of replacing multiple debts with one loan that features a lower interest rate, potentially saving money over time. Consolidation also reduces the number of bills and payments you need to manage, making budgeting simpler.
Consolidate your debt using a personal loan, credit card or account at an online bank. However, this should only be considered if your credit qualifies for low-interest loans and you have enough resources available to you in order to repay these new obligations within an acceptable timeframe.
Once you have an established plan for paying off debts, the first step should be reviewing and altering your budget as well as altering spending habits. One strategy such as the “debt avalanche” method focuses on paying off those with the highest-interest rates first.
5. Set up an emergency savings account
Debt can quickly eat away at your finances if you do not set aside an emergency fund. Experts suggest having a short-term savings goal covering expenses such as paying off debt, car repairs, home maintenance costs and food.
Save a percentage of your take-home pay into an emergency savings account. Make the amount manageable within your budget and stick with it!
Treat this savings goal like any other bill and set up automatic withdrawals from your paycheck or have tax refund deposited directly. Make sure your emergency fund balance stays at least six months worth of expenses so as you build it, the positive momentum will encourage you to keep saving.