In order to get out of debt, you need a plan of action and then you need to execute that plan. Here you will find a simple to follow five-step guide to get you out of debt.
Important note before we begin: You need to have an emergency fund. Something always seems to come up and when it does, you may end up back in debt and will need to start back at step 1 again. So put some money aside first, put it in an envelope, and then don’t touch it unless it’s a real emergency.
Here are the 4 steps you need to follow if you want to get out of debt.
Table of Contents
Make A List Of Your Debts
I know you’ve probably avoided even looking at your debts because you’re afraid of just how bad it is. But if you want to tackle this monster you need to know what you’re up against first. So gather up your recent statements for all of your credit cards, auto loans, and other personal loans and see the complete picture of what you owe.
List these debts on a piece of paper with the name of the debt, the total amount owed, interest rate, and monthly payment.
Don’t forget to write down all of your debts, including old unpaid medical bills and personal loans from family members. We’re going to destroy all of your debt.
The way you’re going to do this is like this:
Credit Card Spending Freeze
First, implement a spending freeze on your credit card accounts. It’s impossible to pay off debt if you continue accruing it!
Start With High-Interest Debt
Second, we will tackle high-interest debt gets eliminated first. These are the ones that are costing you the most.
Write Down Your Progress
Third, you will write down your progress as you continue eliminating your debts one by one. You need to keep track of your victories too.
Prioritize
Another thing that is vital when trying to climb out of debt is to make sure you prioritize. That means you have to think about what debts you have, and which are the most pressing. Make sure you do as much as possible to clear the most important ones first.
By doing this, you will be able to ensure that you get the important debts cleared off soonest. It can be a little overwhelming sometimes, but if you make sure you sort things by priority, then it will be easier to deal with.
You’ll be able to get rid of the immediate problems and focus on then attacking the other debts you have. The worst thing you can do is not deal with the more pressing debtors because this always makes things worse.
What Money is Coming In?
You also have to know what your financial situation is with regard to income. There is a lot to think about when you assess your finances. You have to have an understanding of the money you have coming in every month because this is how you work out what you can afford.
Debt can be a major worry, but, if you know how much you have in terms of income you can set about tackling your debt. Work out what you make as a monthly salary, and figure out if there are any other ways of making sure you get to generate income.
This is something you need to focus on because it will help you in your quest for financial freedom and independence.
Check Your Credit Score
You may actually decide you want to check your credit score. While this may not help directly with clearing your debt, it will certainly inspire you and give you that kick up the backside. Bear in mind that your credit score can affect everything when you get older, and it may give you problems when trying to buy a house. So, you have to make sure you are sensible when it comes to your score. And debt can really give you a poor credit score.
That’s why it’s so important that you find out what yours is so you understand just how far-reaching the impact of debt can be for you.
Cut up Your Credit Cards
Many of us like to have credit cards as something of a financial safety net to fall back on. But, if you want to avoid or address problems of debt then this is the worst thing you can do! There are so many temptations when it comes to getting a credit card, but there are also a lot of problems.
It’s so easy to wind up spending money you don’t actually have, and this can be a drawback for you financially. It makes it really easy to sink further and further into the red. So, you need to make sure you don’t actually take out a credit card. And, if you have any credit cards you need to make sure you cut them up and stop using them.
Create A Realistic Smart Budget
In your budget, you’ll list your income and your expenses. You need to have money left over every month or else you’ll never get control of your debt. Simple enough right?
If you can’t make ends meet, you will either need more money or fewer expenses. Since getting a second job may be out of the question, you will need to cut back and make sacrifices.
Finding what to cut back on
- Cell Phone Bill
One of the best ways to cut your monthly spending is to look at your cell phone bill. You can call your cell phone provider and ask them to audit your account to see if you can be placed on a cheaper plan based on your past usage.
- Cable TV
You should also look at your cable/satellite bill. Are you paying for channels you don’t need? Do you have a DVR you can live without? Better yet, can you live without cable and choose a cheaper option like streaming through Roku, Amazon Fire TV, and Netflix?
- Restaurants
Finally, you can tackle unnecessary expenses such as Starbucks coffee runs, fast food trips, and nights out at Olive Garden. If you’re unwilling to make these sacrifices, then you are truly not serious about getting out of debt.
Putting your leftover money to work
After you’re done creating your budget, how much money is left over? The money left over in your budget will be the amount you can pay every month toward your debt. Make sure it’s at least $200 per month or you will not make a dent in your debt.
Make your budget flexible
As you continue working on your ‘get out of debt plan’, you will of course need to continue to make adjustments to your budget along the way. This is normal and expected. But if you want to budget for something new, you’ve got to get rid of something else.
Lower Your Interest Rates
If your credit score is bad, it can be difficult to get companies to lower their interest rate. But if you have begun paying down your debts already, it’s possible that your credit score today is better than it was when you got your debt in the first place.
Even though most don’t recommend borrowing from Peter to pay Paul, this strategy works.
You need to first get a low-interest loan: either from a bank, a friend or even by opening up a new credit card.
Use A Balance Transfer
Many credit cards offer 0% interest rates on balance transfers for up to 18 months. Take advantage of these offers and then move your high-interest credit card debt over to this account.
I have personally used this to get rid of a $5,000 debt at a 29% interest. I moved it over to a zero percent credit card and got it paid off in 18 months! It’s true, with a monthly payment of $278, I got rid of debt in 18 months that would have taken me more than 2 years and an extra $1,500 in finance charges to pay off.
Consolidate Your Debt At Lending Club
Lending Club is a popular option for those who want to combine all of their debt into one large payment at a lower interest rate. The way it works is simple, you apply for a loan, submit documents such as pay stubs, and after they check your credit, they make an offer. If that interest rate offered is lower than your current one’s, it makes financial sense to switch your debt over.
Trade Your Car
Are you still stuck making high car payments? If you want to truly eliminate your debt, you’ll need to make some changes. You can choose to sell your car and instead buy a more economical one at a much lower payment.
Debt Consolidation
Debt consolidation is one of the easiest ways to go about getting debt-free. This is something you need to make sure you figure out as much as you possibly can. Debt consolidation will put all of your debts together into one lump sum and make it much easier to pay off. You should also look at unsecured loans and maybe consider using one to pay off your debts in one go. It is a lot easier to manage these things when you have them all consolidated.
And there are plenty of debt management companies out there who can help you accomplish this. You have to look at how best to clear all your debts in the quickest and most efficient way. Consolidation is great because it means you don’t have to spend too much time and effort trying to find out everyone you owe money to. Just lump it all together and it will become a much easier amount to clear and manage.
Track Your Progress And Adjust
Now that you have a plan of action, don’t relax and get comfortable. Work is still required to keep you on track. Monitor your behavior and track your progress to ensure you’re still on the right track to becoming debt-free.
Monitor Your Credit Score
Use the Credit Karma app to check your credit score. If you are lowering your balances and paying off debt, your credit score should improve every month.
Celebrate Your Wins
Did you just pay off high-interest debt or an account that was in collections? Congratulations! Celebrate your wins, no matter how big or small. It will keep you motivated to continue on this journey.
Adjust Your Plan
Did you just get a raise at work, a bonus, or an unexpected tax refund? Time to party right? No! Your number one goal in life is to pay off your debt, so be sure to put any extra money toward your goal. It will only help you get out of debt faster.
Listen, just like shedding pounds at the gym, getting rid of your debt takes time. In this fast-paced world of smartphones and breaking news, we all want things to happen right away. But the one trait that will help you get out of debt is perseverance. Don’t give up and keep your eyes on the prize. I know you can do it and you have to believe in yourself too.
Conclusion
Debt is a dirty word these days, and many people shy away from discussing it or dealing with it. You have to make sure you focus on what you can do to get yourself out of debt and become more financially stable. You want to drop-kick the debt right out of your life and reclaim control of things. You can use some of the ideas and suggestions on here to work towards this and make sure you are debt-free.
Thank you for taking the time to read this and I hope this step-by-step guide to getting out of debt has been helpful.
