Debt can be an enormous barrier, preventing individuals from living the lives they envision for themselves and making loan applications harder than necessary – as well as increasing borrowing costs.
Start to reduce debt by creating and following a budget and tracking spending, cutting any unneeded expenses, and using any extra money towards paying off any existing debts.
1. Create a budget
Budgeting is the ultimate way to monitor how much you are spending and where savings could be found, while setting financial goals and creating plans to achieve them.
Start by compiling all of your expenses using a spreadsheet or budgeting app. Be sure to include everything from groceries and utilities costs, car payments and car lease payments in this assessment.
Next, create a debt repayment plan. Experts advise paying off high-interest balances first while investing the remainder of your debt-repayment money into savings accounts.
Once you understand your spending and can save a small amount each month, begin cutting unnecessary expenses such as dining out and attending concerts. Consider starting an additional source of income like babysitting or dog walking for extra income – eventually your bare-bones budget will free up more cash to apply towards that debt snowball!
2. Set goals
If you want to escape debt, setting goals can help. From saving up for vacation or concerts such as Taylor Swift tickets, having something specific as an aim will keep you on the right path.
First, determine your monthly income – this could include paychecks, Social Security payments and any other sources – using an app or spreadsheet. Next, calculate expenses.
Aspiring to pay off all of your debt immediately is an ambitious goal, but setting smaller percentage-based goals may make the task more manageable. For instance, setting goals of cutting your debt by 5, 7 or 10% annually could serve to motivate and keep you on track – so long as you continue making at least minimum payments on each account.
3. Create a savings account
There’s no one-size-fits-all approach to getting out of debt, but these proven strategies may help your finances get back on track.
Experts generally agree it’s wise to pay off debt with the highest-interest rates first before moving onto lower-rate accounts, however if you’re still struggling to save enough to stay above water consider cutting some discretionary spending.
Everyone overspends in some area or another. From cable channels you don’t watch to truffle-and-champagne habits, small changes can add up quickly toward savings for an emergency fund. Another easy way to reduce costs is paying with cash as this makes impulse buys much harder to justify.
4. Pay off your debts
Although there is no guaranteed way to tackle debt, having a strategy in place can help you succeed in this area. Start by listing all your liabilities (credit cards, auto loans and mortgages) along with their monthly payment amounts to get an understanding of the problem and its effects on your monthly income.
Step two is to identify all of your debts from smallest to largest based on interest rates. Begin paying the minimum payments on each, setting aside any excess funds towards savings or debt reduction.
After paying off your smallest debt, use that payment to reduce another on your list until they’re all gone and eventually you will be debt free for good.
5. Get out of debt
Paying off debt can be an important step towards financial health, but it is also crucial that you save enough money for an emergency fund if something unexpected comes up such as a burst hot water heater or costly car repair bill. Otherwise, this could quickly spiral back into debt again!
To get out of debt, the best approach is to list all your outstanding loans and their respective balances. Prioritize these by interest rate and make extra payments to reduce the smallest debt first; when this debt has been eliminated, take its payments and apply them towards paying down another smaller one; once that debt has been cleared up completely use its monthly payments on another smaller debt until all are cleared off completely – this process is known as debt snowballing; it provides motivation while showing tangible progress.