How to Get Out of Debt
The biggest concern among the nation is how to get out of debt. The high-interest rates that are involved with the credit card companies make it very difficult to be debt-free. The interest that has already been added to debt can be compounded. This means that the interest that has already been added due to the delinquency might have more interest added on top of that.
That is considered delinquent as well. The balance will continue to grow and grow. One of the major problems facing people nowadays is debt. This is because of easy access to credit. For example, credit cards allow people to buy beyond their means, with their credit card debt increasing with each purchase, not including the extra fee. People hoping to buy a property or a car can easily create a payment plan or take out a loan from any bank.
Finally, even education is not free. Today’s workforce takes out college loans to pay for a college degree, which then turns into a debt snowball. The trouble with that is they leave college burdened with debt, wondering how to get out of debt. Debt also follows them into the workforce as they turn to payday loans to make ends meet.
Get Out of Debt Fast
Interest accumulates just like the snowball method. It gains momentum and will continue to grow bigger and bigger until it is eliminated. Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it earns it…He who doesn’t… pays it.”
Truthfully, you will need a multi-pronged approach to eliminate the debt you currently have. Attacking the problem from multiple directions enables you to pay off your credit card balance transfers or debt faster.
But before everything else, you need to sit down and do a proper accounting of your finances. It would be best if you had a complete picture of your financial standing so that you can plan your approach and a strategy on how you’re going to save money.
Debt comes in a wide variety, which most of us have – almost all of us. Here are just a few examples of what different kinds of debt we have:
- Credit card debt
- Home Loan Debt
- Student Loan Debt
- Car Loan Debt
- Medical Loan Debt
- Payday Loan Debt
- Mortgages Debts
This list could be expanded exponentially, but we will send it right there. There are many reasons and ways for us to go into debt. The important thing to realize is that there can be an end in sight. The end may be very distant in the future, but there is an end.
To get this, collect all of your bill statements from your various creditors. It would help if you also tried to get a credit report, along with your current credit score. All of these will give you a solid idea of your current financial status.
Besides your debts, you should also get an idea of your everyday expenses and income. Collect your latest payslip as well as some of your usual bills like utilities and food. This will help give you an idea of what your financial state is without the debts.
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Understanding your own finances is going to be the ultimate game-changer. To make changes, one must understand what is wrong. These are the five important steps to budgeting:
- Track Spending: To know what needs to be changed, we need to take a look at all of the transactions that occur.
This can be done on a spreadsheet on the computer, with a pen and paper, or even an app linked with a corresponding bank account that is being monitored.
- Reduce Expenses: We must analyze the transactions that occurred since documenting them.
Looking over a three-month time frame is a decent amount of time to evaluate averages.
Whether eating out is a large portion of a month’s spending or even paid subscriptions that are not being used.
- Action plan: Create a plan to alter poor spending habits.
Have a goal in mind. There must always be a goal in place.
- Fulfill plan: Start applying the action plan to reach your goal.
- Reevaluate: Continue to track your spending patterns and analyze them to see if there need to be further changes made.
Once these five steps have been applied to your finances, make sure they are constantly done. To take this very seriously and make sure that it happens – try and think that debt is not an option. Hopefully, this will help guide you in the right direction to avoid it at all costs.
Credit scores will ultimately fall in the event of delinquency. In this case, the debtor should always be paying more than the minimum payment, including minimum monthly payments. If that is the only amount of money that is being paid, then interest is going to pile on.
Once delinquent, the three major credit bureaus will show that delinquency on their credit reports. Reaching and maintaining a good credit score is far more important than a lot of us realize.
It affects how much will be paid on future loans. Not just the amount of repayment but the potentiality of getting denied as a borrower of funds.
Types of Debt Repayment
As previously stated, all of us have some debt and need strategies on debt repayment, if not all of us. We can take advantage of a few different options to really work hard on paying it off. Many professionals in the world have educated themselves to pay off debt efficiently.
It requires money to pay them upfront because they are unwilling to do it for free. This is their business, and they have to make money somehow. It’s great to consult with a credit counselor, as well.
Debt management plans like consolidating can be very beneficial but also risky. This will take some of your loans with different interest rates and combine them to have the same rate. It then all becomes the same payment. This is just called a debt consolidation loan.
The goal would be to have it all be a lower interest rate to help save money in the long run. If it does not decrease the average interest rate, it might be wise to stay away from this option.
Pay Off the Bigger Debt First
When it comes to paying off multiple debts, it is always good to pay off the most significant debt and keep track of late fees from credit lines. This is part of the snowball method of payment that then turns into the avalanche method.
To do this, you focus on your biggest debt by paying more than the minimum. With payoff plans like this, you will be spending the minimum to keep them at their current level for all your other debts.
When your largest debt is paid, you transfer all the money you were paying into the debt to the next largest debt, reducing the extra payments you initially had. You will notice that this means there is more money going into that payment.
This means it is faster to resolve. You then repeat this process for every debt. As each gets fully paid, you have more money to pay the next debt with.
You can also do the reverse of this approach and start with the smallest balance in debt. But the larger debts often have the highest interest rate. Eliminating that debt will free up more money in the long run, so it is the better choice.
This may be the best method of paying off debt, and there are a few different ways to do it. There is one thing to understand, though. The best way to pay off debt – is to invest more money into it. There is a very applicable calculator that demonstrates how it is done on the Financial Healthiness website.
The best way to explain an effective pay off method is with an example. Keith has 3 debts: an auto loan for a Ford vehicle, another auto loan for a Toyota vehicle, and the last one is a student loan. He only has a few months remaining on his Toyota Auto Loan. Here is a list of the loans with their monthly payment and interest rate:
- Ford = 5 years with a monthly payment of $400 @ 4.15%
- Toyota = 6 year with a monthly payment of $250 @ 4.25%
- Student Loan = 10 year with a monthly payment of $270 @ 4.00%
Once Keith has paid off the Toyota Auto Loan, it would be wise to use that $250 and put that extra money towards another debt.
Instead of using that for additional spending money throughout each month, it should pay off more debt. He should put it towards the loan with the highest interest rate to save as much money as possible.
In this example, he should put it towards his Ford loan and pay $650 a month instead of the normal $400. Once the ford loan is paid off, he should be putting all $920 towards his student loan. This method is an excellent way to focus on paying off credit card debt fast.
How to Start Paying Extra
Most debts are a monthly payment, which is a fantastic way for us to attempt to eliminate debt. Many employees get paid bi-weekly (every other week), which is the cherry on top of this pay off method. Using Keith’s Ford auto loan as the example – if he gets paid biweekly, he can make biweekly payments of $200 to go towards his loan.
There will be two times throughout the year that he will receive three checks in a month. Those two payments will help Keith get a payment ahead on his auto loan. If he did not make a single additional payment throughout the loan, except making these two extra payments yearly, he would be making 5 additional payments, which will help him pay it off in 5 months less than the full loan.
That will help him save money on loan itself. This example can be used for every single debt in the book, it can make it difficult when the employee is not paid biweekly, but it can still be done.
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Selling Old Stuff
Many of us have a lot of different items in our home that are unused or just old. Thanks to the internet, we have many different options to sell these items. These items can be placed on Craigslist, eBay, or even on Amazon.
They all create straightforward ways of selling merchandise. This has more than one benefit. It will help create some extra cash to either pay money towards delinquency or debt in general. A huge benefit is that it will help clear a lot of the clutter in your living space and create a garage sale. Clean living space will create a better area to live, which will assist in being effective in more than a few ways in your life.
Spend Less or Make More
Treating yourself and spending money on tangible things is okay but be reasonable about it. Even getting rid of a smoking habit can earn you quite a bit of saving every year.
Then, there is your income. Many people have a single source of income, but it may not be enough money with a debt hanging over their heads.
We have two options: we can spend less money on our variable costs from day to day, or we make more money to pay off our debts, creating emergency savings. Utilizing both of these strategies is the ultimate strategy.
There are numerous methods to decrease our spending habits; however, on the other hand, we have many options to make more money. We can either find another job that will pay us more, have part-time jobs, or we can start a side hustle,
Side hustles are extremely popular right now, especially with millennials. It is just a job that they get outside of their regular 9-5 job to make additional income. Some of these include driving for Uber/Lyft/Door Dash or other driving services like that, window cleaning, selling books, bookkeeping, freelancing, starting a business, or even walking dogs.
Many people take advantage of such opportunities. Many companies help support these side hustles to assist in extra income. Maybe the side hustle could replace the 9-5 day job.
Tracking spending habits and paying close attention to budgeting can be exhausting, especially with much debt involved. We have to be able to find the enjoyable part of going through all of this effort.
One way to be able to enjoy this grueling process is by rewarding yourself. For example: at the end of every month, you reward yourself with your favorite treat, new books, new video games, new shoes. Whatever the case may be. This is hard work, but it will pay off in the long run.
We live in a world that gets what we want when we want it. It can be difficult to be patient and wait for the things that we want. The credit card companies make it very simple for us to go into debt by providing such incredible offers.
We always have to ask ourselves in the back of our minds this question: Do I need it or do I want it? We want a lot of things, but not a lot of things that we need. Either we pay interest, or we make interest. This is our decision.
Overall, paying off your debt is not an impossible task. All you need to do is to approach it in a smart manner and with the right mindset. You’re not the first to have fallen into this financial mess, and you won’t be the last.
But others managed to climb out of it thanks to discipline and taking the right approach to the problem. Sit down with your bills, credit card company, and start climbing out of that debt hole today.
Updated on January 19, 2021