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Debt seems to have been normalized by many people worldwide, yet the burden it carries can be overwhelming. You see people on social media and TV saying they are out of debt, and you cannot help but admire them with a tinge of jealousy. However, it is possible to get out of debt by creating a workable plan even with low income. You will realize that turning your financial situation into debt-free involves a lot of work and sacrifices. Getting out of debt needs planning, commitment, and self-discipline; nevertheless, it becomes easier when you master the art of monitoring spending habits.
In this article, you will realize that getting out of debt entails more than sorting a few credit card balances; it involves altering one’s spending habits, budgeting, knowing what you owe and to whom, establishing emergency funds, and much more. Remember, you will make mistakes in this journey, but do not lose heart, pick yourself up, for it takes endurance to succeed in getting out of debt. We present you with practical suggestions to get out of debt faster.
1. Stop Borrowing
If you are beginning your debt-free journey, the first thing you want to implement is to stop any further borrowing. Avoid using your credit cards, or running to the bank or any financial institution for a new loan. It is important to reshape your attitude toward debt and money if you want to avoid borrowing. Understanding the true cost of new loans and swiping credit cards will help you avoid digging greater debt holes that you may never get out of.
Therefore, make a resolution to live each day on a cash basis while making spending habit changes. Do not think about big decisions like credit card balance transfers and debt consolidation for now. In the beginning, you want to assess your true financial situation. We recommend cutting your credit card so that you are not tempted to use it anywhere when the supposed emergency knocks at the door. Starting a debt-free journey is like going to war; you don’t want the number of enemy soldiers to increase; the fewer, the better.
2. Track Your Spending
Debts are money spent that you did not have for future payment. Therefore, tracking expenditures and knowing where your money is going is key to getting rid of debts. You can only implement budget cuts and reallocate funds for debt management if you have a clear picture of your spending. It is recommended you track your monthly bills for one month, computing even the smallest expense you have incurred that month. This record also includes all payments made to defray debt obligations.
You could use several ways to track your spending, including using a budget worksheet, notes in a notebook, using an expenditure tracking app, keeping receipts, and using banking apps. Whatever method you use, ensure it is convenient and easy to remember daily to get a clear view of your total monthly expenditure.
3. Draw a Budget
Once you know your spending, you need to create a budget, using the established spending as a guide. The budget should consider all your monthly needs, deterring you from reverting to borrowing to handle necessities. The budget will help you see which areas you could cut on spending. It will open your eyes to areas you spend a lot of money and how to make necessary adjustments without sending your life on a roller-coaster. Remember that getting out of debt is a sacrifice, so be willing to make hard sacrifices, and you may realize that you do not need a lot of things that often take money and time to maintain.
Do not carry a budget in your mind; put it down in writing. Writing it down gives you a sense of commitment, and you will not forget to record even a small expenditure or income. In the budget, you should also have financial goals. Some studies show that writing goals increase the probability of achieving them by 42%. The goal, in this case, is to get out of debt as fast as possible. Still, you also want to remember to build an emergency savings fund because an eventuality can forcefully drag you back into debt without an emergency fund. Even after the debt is cleared, you could still have a goal of saving for future investments. Remember to include these financial goals in your budget and push yourself to achieve them.
4. Use the Snowballing Method
After knowing your spending and setting up a budget to live with, you can now move to implement a payoff strategy. You should plan how you want to pay off these debts faster by following a maximum payoff strategy. The debt snowball approach is one of the best approaches ever invented in motivating you to get out of debt. You are probably wondering what the debt snowball method is; we will explain it in a bit.
This debt payment method requires that you write down your debts from the smallest to the largest. You begin attacking the smallest debt with a vengeance and aggressively pay it faster using money cut from the budget. After the first debt is cleared, use that money plus any other money you can glean from extra jobs or budget cuts to attack the next debt on the list. You will realize that the money you are using to pay a debt increases (snowballing) before you hit the biggest debt you have.
Let’s assume you have debts ranging from $500 for credit cards, $800 auto loan, $ 1,000 student loan, and $50,000 mortgage. Assuming you have dedicated 20% of your income to debt payment, approximately $200 monthly. It means you will begin to pay off the credit card debt first, and after the second month, you will move to an auto loan, then a student loan before plowing back all the amount to tackle the mortgage loan.
The initial amount dedicated for debt payment should be kept constant or increased with money from other unnecessary expenditures. The Snowball method will give you the motivation needed to keep going as you witness your debts vanish one by one. Soon you will be out of debt before you know it.
5. Increase The Amount Allocated for Debt Payment
If you long to get out of debt faster, put as much money towards debt payments monthly. If you get extra money, planned or unplanned, dedicate that money towards paying off your debt. Ensure you set a percentage of your income (often 20%) towards debt payment but do not get satisfied with this amount; look for opportunities to increase the figure to get you out of debt faster.
No matter the situation you have found yourself in at the month, ensure that the minimum amount set for debt payment is not interfered with. You should make a commitment and a rule that you will pay off the minimum payment even if you bump into an emergency expense.
6. Consider Debt Consolidation and Balance Transfers.
Some people struggle to make a living with little or no income, and the ends seem apart. If you have several credit cards and are overwhelmed with a high-interest rate without adequate income, you could consider debt consolidation or balance transfer to minimize extra expenditure. However, care should be taken when implementing these strategies.
A balance transfer could offer a 0% intro rate for a period, but this move often comes at the cost of an upfront fee. If the balance transfer offers you an introductory rate for one year, you should ensure you clear your debt before that duration lapses. Debt consolidation often sounds like an ideal idea, but if you do not clear within the interest-free period, you will end up worse off than where you initially were. Remember to couple debt consolidation with a lifestyle change, budgeting, and consistent payments; otherwise, you will find yourself in a deeper debt hole. Do not be tempted to transfer debt using retirement savings or home equity. This way, you avoid the temptation of trading bad debt with good debt.
Mortgages are considered good debts because they allow you to have a roof for yourself and your family as you build wealth over time. On the other hand, credit cards are bad debts, having a high-interest rate with the ability to ruin your spending habits. If you pour your home equity into paying short-term debts, you will end up in a worse financial position than you started. You could be sucked back into huger debts with no equity to lean on. Therefore, it is recommended you focus on debt payments instead of consolidating.
7. Renegotiating Credit Card Debt
Credit card issuers often allow customers to renegotiate their credit card balances by paying lump sums rather than costly monthly payments in a process called debt settlement. You will call your lender or creditor to request if they could lower your credit card interest rate, which you could be awarded if your payment history is okay.
You could also push for credit card fee renegotiation should your creditors refuse to lower the interest rate. You could request them to consider lowering or waiving some recurring charges on the credit card. By making a phone call, you can reduce your credit card charges, or the company could suggest other ways to lower your monthly payment. You could consider reducing bills, such as phone bills, cable bills, and electricity bills. If the lender is adamant, do not be afraid to shop around to find some companies with a lower interest rate.
8. Build a Family Budget
Some families have one member handle all household finances with no one else knowing what is going on. However, to succeed in being debt-free, the family must have a strict budget geared towards paying off debt. Your family should be on board with this strategy. You need to explain to your partner and family members what you intend to achieve and your debt situation. Be frank about debts, and your strategy to pay them, and invite them to support your repayment strategy.
An honest discussion with the family about debt and repayment plans will motivate everyone to help in tracking expenditures and adhere to the budget. Your efforts to save will bore no fruit if you live with people who show no regard for the budget. Your family should be on the same page with you in your debt-free journey. However, it might be a hard conversation with your kids having to do with less since big purchases should be limited.
If implemented, these conversations would benefit your children, helping them learn savings and budgeting skills from home. Ensure the family is involved when drawing a family budget and encourage them to set specific goals to focus on. You can have a free budget or a premium one on EveryDollar to help you budget well. This budget connects to your bank account, tracking your spending and handling debts when due.
9. Start a Side Gig
It is easy to make a side gig that can help supplement your current budget. If you have a talent for making things, you can sell them online. Other side gigs that can earn you extra income include dog walking, blogging, making YouTube videos, editing, designing, or virtual office assistant. You could get these gigs on freelancing sites such as Fiverr and Upwork to begin working part-time for extra cash used in paying debts. Turn your hobby into a money-making machine in no time by registering with these freelancing sites.
10. Get a Part-Time Job
If you are afraid of starting a business, you could venture into several side hustles, like becoming a driver for Uber or Lyft. You can also do pizza delivery at night, thus helping in bringing extra income home. What about using your free time working for Grubhub and Uber Eats delivering food during the day? It involves sacrificing some extra coins in your pocket to help you reach your debt-free goals faster.
11. Sell Your Car
You can sell your car at Autotrader, your new car’s average monthly payment is approximately $577. If you think about it, this is an outrageous amount that could move your debt snowball faster as you throw $577 every month. Your car is a liability you may not need during debt repayment. Instead, use public transportation means or car-share if necessary.
12. Get Rid Of All Your Credit Cards
The internet sometimes tells you to close your credit accounts if you do not want to use them, a bad idea. Shred them, burn them or shoot them, whatever you see fit if you want to get out of debt. We had talked about this before, but for emphasis, eliminate all credit cards and only buy in cash. These cards will only keep you stuck in the debt traffic; eliminate them and never look back!
13. Employ The Envelope System
The envelop system helps you see and feel money leave your hand, which you need to limit your expenditure. When paying with cold, hard-earned cash, you will spend less than with credit or virtual money. The envelope system also will help you track your spending and know what you should eliminate off the budget.
14. Stop Investing
When aggressively paying debt and you want to get out of debt faster, suspend any investment, including contributions to your 401(k). The focus of your income should go on getting out of debt as fast as you can. Only after you are out of debt and have saved six months of expenses in an emergency fund can you resume contributions. When you have put up the fully-funded emergency fund, you could set up 15% of your monthly income in a retirement fund.
15. Do Not Compare Yourself With Anyone.
It is important to keep your motivation high as you eliminate one debt to another. Avoid comparing yourself with the Joneses, for the Jones are broke. Comparison will dampen your family’s spirit of following the set budget and getting out of debt faster. Remember that you need to live like no one during the debt payment period so that later you live like no one else. Have the goal constantly before you, and in 10 years, you will be debt-free with no financial worry when the rest has mortgages, auto loans, and credit card bills to worry about.
16. Listen to Financial Podcasts
Tons of YouTube videos and shows exist that address the issue of how to get out of debt faster. These podcasts and videos will encourage you to keep going on with the journey. You will find guidelines and instructions on planning well with your money, no matter how little. The talk show will enable you to see that the sacrifices are worth making as you hear from people who have paid off hugger debts with less income.
Traps to Avoid When Getting Out of Debt
1. Filing for Bankruptcy
When your financial world seems to crumble, and you do not have enough money to go by or even to carter for basic bills, filing for bankruptcy may seem to be the only option you are left with. If you have reached these depths, slow down, breathe in, and know that there is hope. Bankruptcy should be the last resort after all else has been tried to no avail. The debt-free journey can be tough; however, you want to remember that the effort you put into it is worth the future. With diligence, planning, and dedication, you may never need bankruptcy at all.
2. Buy Now, Pay Later Programs.
The greedy commerce has come up with several BNPL schemes to encourage you to have all you want right now and sort the bill later. However, this can be a trap as you spend more than you budgeted, thus plunging you into debt.
3. Payday Loans
Sometimes Payday seems far off, and you need money to care for some necessities. Payday loans may come in handy, but they carry exorbitant interest rates and fees. These fees include monthly fees, establishment fees, direct debit, late fees, and loan extension fees that exacerbate your debt.