As there are various methods available for getting out of debt, such as creating a budget and cutting expenses; using the debt snowball method; or saving money by eating at home more and limiting unnecessary purchases, there are various strategies for taking action against debt.
Use any financial windfalls such as tax refunds and work bonuses to pay down debt. Finally, try to build up an emergency savings fund sufficient to cover at least six months of expenses (Baby Step 1).
1. Make a Budget
De-debting requires you to spend less than you earn; to achieve this goal, a budget should be created and adhered to.
First, calculate your income and expenses by listing all sources of money available to you and adding up what you spend each month on essential expenses such as rent or mortgage payment, utilities bills, food costs and health care as well as non-essential purchases such as entertainment.
Make a list of your debts, noting the amounts, interest rates and monthly payments for each. Next, prioritize them using the “debt snowball” strategy by allocating any extra money toward paying down smaller debts first – known as debt snowballing.
Finally, establish an emergency savings fund in a separate bank account that you do not use for other purposes. Aim to have enough saved up for at least one month’s expenses as unplanned expenses could derail debt repayment plans.
2. Cut Expenses
While cutting back on coffee and avocado toast may help, to get out of debt effectively you must also change your spending habits in a lasting manner. Track all expenses for at least a month to gain insight into where your money is being spent as this can reveal areas in which cost-cutting measures could have minimal effects on quality of life.
Once you have a solid understanding of your budget, it’s time to make some tough choices. Focus first on paying more than the minimum each month on any high interest credit cards before turning your attention towards saving for emergencies and unexpected expenses – starting a savings account or joining Financial Peace University classes are great ways of doing just this – both offer step-by-step budgeting plans to help get closer to reaching your goal faster.
3. Pay More Than the Minimum
How to get out of debt requires careful planning and discipline, setting financial goals and tracking expenses with an excel spreadsheet or budgeting app is crucial to making progress towards debt freedom a reality. Writing down goals makes them 42% more likely to succeed!
As part of your budget plan, it’s essential that you aim to pay more than the minimum on each debt every month if possible – this will enable you to make progress toward clearing off balances faster and get out of debt faster.
Make a list of all of your debts, such as credit card balances, auto loans and mortgage payments. Include details such as total amount owed, monthly payment amount and interest rate.
Prioritize your debts based on interest rate. This strategy, known as the debt snowball strategy, can save money in the long run by shortening repayment timelines as each balance is cleared off more quickly. Refinancing could also provide lower rates.
4. Save Money
While cutting back on lattes and avocado toast may help, there are other strategies for saving even more. Finding a part-time job, or other sources of income such as selling old furniture or clothes could make an even larger impactful. Also consider finding used cars with minimal mileage that are in good condition (using resources such as Phil Edmonston’s Lemon-Aid book or Consumer Reports to do your research) instead of purchasing brand new vehicles – you might get more bang for your buck this way!
Once you have extra cash saved up, start an emergency fund. This is essential in case something unexpected comes up that causes debt again. Setting goals also increases chances of reaching them by 42%! Working with a credit counselor to determine the most efficient method of paying off your debts may help – they may negotiate with creditors on your behalf and arrange solutions such as a debt management plan, administration order or individual voluntary arrangement to address them.