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If you're in debt, feeling desperate and looking for any solution that will deliver you from your money troubles then this might be the right article. Here's how to get out of debt.
Debt is what every American is scared of. It prevents you from achieving financial success. Debt keeps people from purchasing a house, traveling abroad, or saving for their retirement. Debt is what causes you to feel stress and frustration as you can’t control your finances and have many limitations in your life. Luckily, there are ways to eliminate debt and take control of your money. Here is your step-by-step guide on how to get rid of debt and manage your finances.
A Step-By-Step Guide to Getting Rid of Debt
#1 Understand The Type of Debt You Have
The first step toward your financial independence is to understand the type of debt you are having. While there are thousands of people with some debt these days, it takes a lot of effort and dedication to eliminate it.
Consumers need to adapt to changes and alter the financial habits that led them to debt. Is it the money loan app that issued you additional money for a couple of weeks? Is it a credit card debt you can’t cope with? Realizing what kind of debt you need to deal with will help you make a precise debt repayment plan without falling back into this abyss again. In case you have no clue how to manage existing debt, it may be wise to consult with a credit counselor.
This is a certified professional who can help you with tracking your spending, understanding your debt, making a budget, and creating a debt repayment plan. For instance, you may turn to such nonprofit organizations as the National Foundation for Credit Counseling or the Financial Counseling Association of America.
#2 Know How Much Debt You Have
Consumers who have multiple types of debt feel it challenging to keep track of how much they owe. It often leads to missed payments and finance charges each month. If you don’t make the monthly payments on time, you will face penalties that will increase the total cost of borrowing. You won’t be able to tackle all types of debt at once but it’s important to figure out how much debt you are having right now.
In fact, the average American has $90,460 in debt, according to the 2021 statistics. It included all types of consumer debt products, from personal loans to credit cards, student loans and mortgages.
Create a list of your debts, the amount you own, as well as the interest rates for each debt. It’s useful to utilize canceled checks or bank statements, recent billing statements, or your credit report in an attempt to obtain a full list of your current debts. It’s necessary to include the minimum payment demanded for every crediting option and every debt. You will be able to find out the highest-interest debts that you should tackle first.
#3 Control Your Monthly Spending
Some consumers have bad spending habits. Are you overspending each month which leads to debt? Even if this is not your case, it’s much easier to begin your debt repayment process with new spending habits.
The next step toward reaching financial freedom is comparing your income with your monthly costs. You should split your spending into several categories including your needs and wants. Your needs are mandatory costs and your wants are discretionary costs.
The examples of mandatory expenses are:
- Rent payments;
- Utility bills;
- Groceries;
- Childcare;
- Health Insurance;
- Prescriptions;
- Transportation.
Discretionary costs include:
- Gym membership;
- Cable TV;
- Home décor;
- Eating out;
- Personal grooming;
- Clothing;
- Entertainment.
If you are ready to get rid of your current debt obligations, you should reduce spending. Your monthly costs need to be much lower than your income. This is the golden rule for successful debt repayment. While you most likely can’t lower your mandatory spending a lot, you may try your best to cut down discretionary expenses to maximize your payments.
#4 Make a Repayment Plan
The next step is to decide in what order you want to repay existing debt. There are several strategies on how to prioritize your debts based on balance, interest rate, or other factors. For example, the snowball method means you start repaying the smallest debt and move forward to the largest one. Dave Ramsey first introduced this strategy, while the name refers to beginning with something small and building it into bigger things.
The avalanche method is the opposite strategy. It means the borrower should repay the debt with the highest interest first. This way you gradually see the progress and it will be easier to repay smaller debts. This method is sometimes called debt stacking and it concentrates on prioritizing debt by interest. You may already know that the higher the interest you need to pay, the higher the total cost of borrowing will be.
#5 Create an Emergency Fund
While you are trying your best to repay your current debt, it’s also essential to make an emergency fund. It will protect you from getting into debt again in the future. Also, this is the common reason why consumers accumulate debt in the first place.
When you don’t have any savings set aside for the rainy day, you don’t have a safety cushion and have to rely on crediting options and lending products. These obligations are often rather expensive and may affect your credit.
Having a solid emergency fund will help you avoid these issues, and give you more flexibility to handle unforeseen situations and unpredictable expenses with your own financial means. Even if you set aside a few hundred dollars each month, you will gradually build your emergency savings. Later, if you urgently need to get your car repaired or cover a medical bill, you won’t need to turn to lending companies.
The Bottom Line
It’s easier to accumulate debt than to get rid of it. While it certainly requires a lot of effort and concentration, if you stay motivated you will improve your personal finances and eliminate debt. Whatever debt repayment method you choose, make certain you build an emergency fund to protect you from further financial disruptions later in life.
Avoid debt in any case and think about how it may damage your credit report. Using a debt repayment calculator online can be beneficial for those who want to make this process smooth and fast.