Tired of being strapped with debt? I know I am! All too often getting out of debt seems like an uphill battle. We have to keep on fighting just to avoid being steamrolled by our own mountain of debt. Many people are in this same situation, feeling strapped with debt. With the uneasiness of the world economy, it makes sense for everyone who can to focus on eliminating debt and working toward financial independence. It’s time for you to start living your life differently and preparing for the future by becoming debt-free. Life changes when you have no debts so here are tips to help you get out of debt.
Here are 7 quick tips to help you get out of debt.
Tip # 1. Spend less than you make.
I had to put this first. After all, everything hinges on this one. This is the reason that you are in debt in the first place. If you had the money to buy something you wouldn’t need to go into debt for it. It doesn’t mean that you necessarily have a bad habit here as sometimes unexpected expenses hit us all, and for that point in time we are forced to spend more than we have. Can you say college tuition? Unfortunately, this is where most people get started. They graduate high school never having taken any kind of personal finance class. Then they head off to college thinking the most important thing to do no matter what is graduate and before they know it they are thousands and tens of thousands of dollars in debt through student loans.
The key here is to know what you make and keep track of what you spend. Once you are out of money, you have to stop spending. Sometimes that means making tough decisions. I’m not saying to stop going to school, but know where you stand and be prepared to deal with it well before you graduate.
Tip # 2. Create a budget.
There are a lot of people that cringe when they hear the word budget. They even think of a budget as something that restricts them and ties them down with a set of rules and limits, where, in reality creating and keeping a budget can set you free from financial handcuffs of interest and other obligations. A budget can be really simple just make a list of your monthly income and a list of your monthly expenses. Once you’ve done that all you need to do is subtract the expenses from the income. If you have a positive number, things are looking good. However, if you end up with a negative balance you will have to start making budget cuts or you’ll just dig yourself deeper and deeper into the money pit.
Tip # 3. Reduce your expenses.
It’s not uncommon if you are one of the many people who live paycheck to paycheck and feel you are not wasting money or that you are already frugal with your money. You may be thinking there’s nothing to reduce in your spending. Here is a tip if you can’t think of anything of the top of your head. For a week write down everything you spend money on, whether its $1,200 for your mortgage or $0.50 for a soda at lunch, it all adds up. At the end of the week review your list. Is there anything you could have done without? Think about it someone who goes out to eat lunch every day might spend seven or eight dollars. In a week this could be $35 to $40. In a month it could add up to over $140. Cutting some of these types of expenses out could really help you reduce your debt.
Tip # 4. Pay extra payments.
The whole point here is to get out of debt. When you identify and cut some unnecessary spending you need to use your new-found cash flow to make additional payments on your financial obligations. Just think how much faster you would pay off your mortgage if you just paid an additional $100 or $200 each month. It doesn’t seem like a lot but think of it this way. You are paying $100 on the principal and you will be saving four to six percent interest on that $100 for the next 30 years or so. It really adds up. If you have debts like credit cards that interest rate is often way higher and can reach up to 25% or more. Think of how much you can save with each $100 that is used to reduce your balance.
Tip # 5. Pay the highest interest rate balances first.
Which debts should you pay first? When deciding which debt to pay your additional payments to look at what each one costs you. Usually, department store cards and credit cards are the highest and often charge over 18% interest and that is just the regular rate. It gets much higher if you have ever missed payments or are currently late on payments. You will get the most bang for your buck paying your extra payments on the loan with the highest rate first. Think of it as a guaranteed return on your investment. For example, if you are paying 18% on your credit card and you make an extra payment of $100 you are guaranteed to save 18% that you otherwise would have had to pay. That’s like a guaranteed 18% return on your money!
Tip # 6. Roll your payments.
Eventually, by paying extra on your debts you will start to pay them off, which reduces your expenses. Once you get to this point you need to roll the amount you were paying on the highest interest debt to the next highest interest debt. This method is often referred to as a snowball debt reduction plan. When you do this, you are paying the extra payment and the normal payment from the first debt on the second debt along with its normal payment. This is kind of like a snowball effect. Each time you pay a debt completely you roll that payment into the next debt, making a larger and larger payment. As you start to pay off debts you will see how each payment starts paying down the principal balance faster and faster on the next debt.
Tip # 7. Stick to the plan.
This is the most important part of becoming debt-free and probably the hardest. Each time you pay off a balance you will free up some additional cash flow. When you do this you will also reduce the stress caused by financial burdens. Be careful and don’t falter on your plan. You will always have to stay focused to accomplish your goal. Debt can be a vicious cycle that will tempt you to use that extra cash for things you have wanted and possibly have gone without for some time. What happens with most people as soon as the stress and financial burden get a little lighter? They think everything is now going to be good and then they go into debt again and start the cycle over again. Just think how much extra cash flow you will have on a monthly basis when the debts are all paid off and how easy it will be to pay cash for things.
All in all, if you set some smart goals and follow some simple steps you can learn to get out of debt and enjoy all of the benefits that come with it.
