Owing money is a burden, everyone knows it, but not everyone is carrying that burden anymore. Some people have put down their load of debt and are now living without owing anything. How did they do it? There are a number of ways to get out of debt, so let’s talk about a few, just to get you started.
Know the Numbers
The first thing to do is to figure out just what your situation is. Sure, you know you are in debt, more than you can pay immediately, but just how much and who do you owe? Have you got a list? If not, make one. Find all your debts and record them in a single place. Include payment schedules, interest rates, current balances, and any other information critical to understanding where you stand.
Another number you need to know is your credit score. In some cases your credit is bad and you won’t have many options for things like consolidation loans, but in others you may be paying too high an interest rate and be able to get it reduced.
Check your credit score and review it thoroughly. Contact the agency and contest anything you think is wrong. Contact your bank or credit card company and ask what kind of interest rate you can get with your current score. They might be able to lower what they are charging you, saving you some money in the long run.
Finally, you need to analyze your spending and record it. Then create a budget. That will show how much you spend, your expenses plus any additional spending, and your income. Hopefully you have more income than expenses and can use that difference to pay down your debt. If not, here’s the next bit of advice.
Cut the Expenses
If you are spending more than you make you really have no option but to continue going deeper in debt. To change that you can either increase your income or decrease your spending, if not both. Reducing your expenses is the option you have the most control over. Getting a raise, a new higher paying job, or earning money on a side job are all possible, but you can’t guarantee any of them, only work hard to make them happen.
Expenses you can change at will. Get rid of your cable bill by canceling the service. Drop your gym membership and walk or run instead. Stop eating out, or at least cut back severely, and eat at home. Take lunches to work. Brew your own coffee at home. Sell your extra car. Walk, bike or bus to work instead of driving. You are in complete control here and every dollar saved can go straight into debt repayment.
Consolidate the Debts
Having a lot of different bills can make it difficult to manage payments, and missing payments can cost you a lot in late charges. Plus, many of these may be at higher interest rates than you can get elsewhere.
Here’s where getting your credit score pays off. Consider taking your high interest debt, such as credit cards, and consolidate using a personal loan. Even if your credit rating is no better than when you got the credit card, a personal loan will frequently have a lower interest rate. Since this is a term loan rather than revolving credit, you may help your score by balancing the types of debt you are carrying. And with the credit cards paid off you can put them away, cut up the card, or otherwise stop spending on them. Having a zero balance is a great motivator to keep you from using a card.
Pay the Smallest
There’s two major tactics for paying off multiple debts. One is to pay the highest interest debts first, while still making minimum payments on everything else, to save money on those interest charges. The other is to pay the smallest first, again paying minimums everywhere, and assuming interest rates are roughly similar, and eliminating a debt as early and fast as possible.
While the high interest first tactic is mathematically what will save the most money, the smallest first is the one that research has found to be most effective. Why? Because people are motivated by progress and each bill paid off is a milestone on the way to being debt free. Paying the smallest first motivates people better and keeps them working the system. Just remember, when you pay off something, you don’t get to pocket the money you were using to pay it off. That whole amount goes into paying the next debt, speeding up your rate of paying it off even more.
Control the Spend
This is a slightly different take on where your money goes from the section on expenses. Expenses tend to be regular monthly amounts, or perhaps daily in the case of paying for lunches or coffee. This is about controlling spending on things like that new phone, or new TV, or a vacation. All the non-essential purchases should be put on hold until you have met your goal of being debt free. This definitely includes ‘windfall’ income.
Remember all money is the same, it is all part of your income and should all be used to meet your basic expenses and to pay down your debt. Getting a bonus or a raise? Use it to pay down debt. Income tax return? Pay down debt. A Christmas card with cash in it? Pay Down Debt. No income should be exempt from your budget and your plan to be debt free.
Each of these strategies has many refinements you can try. For instance, there are literally hundreds of ways to cut expenses depending on your individual situation. Learn all you can and utilize any that work. Once you decide you will be debt free, you can make it happen. It may not be easy, but it is possible. Make the decision and be Free!
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