Whether credit card debt, student loans, mortgage or any other form of financial obligation, debts can significantly affect your financial well-being and peace of mind.
When it comes to getting out of debt, the earlier you start with a strategic plan, the better, as there are no quick fixes to getting out of it.
Finding effective strategies to eliminate debts is crucial for achieving financial freedom. If you want to regain control over your finances and pave the way for a debt-free future, here are some ways to help you get out of debt.
1. Create a Budget
The first step to getting out of debt is to create a comprehensive budget. List all the accounts that constitute your debt and calculate precisely how much you owe. Then, list all your sources of income and expenditure and identify areas where you can cut back. This will give you a clear picture of your financial situation and help you allocate funds to pay off your debt.
2. Prioritise High-Interest Debts
Focus on paying off high-interest debts first. These debts accumulate the most interest over time, making them more expensive in the long run. By tackling these debts first, you can save money on interest payments since less interest will accrue over time. This strategy is often referred to as the avalanche method.
3. Snowball Method
The snowball method entails paying off the smallest debts before moving on to larger ones. As you pay off each debt, you often gain a sense of accomplishment and motivation, which can help you stay on track.
4. Consolidation Loans
Try consolidating your debts with a single loan with a lower interest rate. This can make managing your debt more straightforward, and you can save money on interest.
However, it's essential to calculate how much is already being paid back each month on existing loans and then compare it to the consolidated payment. If the payment is higher, switching might not be a good idea, even if a single repayment is easier to manage.
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5. Increase Your Income
Finding a passive income opportunity is a good way of making extra money. Look for ways to increase your income, such as taking on a part-time job, freelancing, or selling items you no longer need. The extra income can be directed towards paying off your debt.
6. Lowering your interest rate
Creditors or lenders might reduce your interest rate if your financial status is positive, you have consistently made punctual payments, or you have a minimal record of missed payments. Another option is to explore the possibility of obtaining a balance transfer card, which has the potential to decrease your interest rate.
7. Cut Unnecessary Expenses and Live Below Your Means
Identify discretionary expenses that you can cut back on. This might include dining out less, cancelling unused subscriptions, or finding more cost-effective ways to entertain yourself.
While working on paying off debt, consider adopting a frugal lifestyle and living below your means. This will free up more money to put towards your debt payments.
A helpful way to prioritise your spending is the 50-30-20 budget rule.
Allocate 50% of your income towards essential needs like food, rent, transportation, utilities, or insurance.
Allocate 30% towards personal expenses like phone bills or a weekend treat. You may want to watch your wants and indulgences to put more towards your debt.
Keep the remaining 20% towards savings and debt payments.
Also, look out for deals such as weekly ads or coupons on the items you buy monthly and take advantage of the opportunities.
Other ways to cut spending include:
- Having a home meal plan that you can follow instead of eating out
- Cancellation of membership plans (such as gyms and other clubs) that you no longer keep up with.
- The 30-day rule — Before making a large purchase, consider it for 30 days. That could help you avoid making impulsive purchases that take away from your savings.
- Cut down on utilities, phone plans and other subscriptions that might not be necessary.
- Consider using ride-share and public transport to save gas and car maintenance costs.
8. Credit Counselling
Seek assistance from a credit counselling agency. They can guide and assist in managing your finances by helping you create a debt management plan.
9. Debt Settlement
Consider negotiating with your creditors to settle your debt for a lower amount. This can be a viable option if you need help making payments, but it may impact your credit score negatively.
10. Financial Windfalls
Put unexpected financial windfalls, such as tax refunds or bonuses, directly towards your debt. This can make a significant dent in your outstanding balances.
11. Set up an emergency fund
To maintain progress with your repayment plan, set aside money you can access for unexpected expenses. Plan to save at least three to six months of living expenses in your fund.
To set up an emergency fund, follow these steps:
- Look for ways to save — The difference between your general savings account and your emergency fund is that one is for emergencies only. Use our budget calculator to find ways to save each month to start building your emergency fund.
- Reduce your take-home pay — Reallocating your funds by maxing out your 401(k) and automating 20% of your savings into a separate account force you to stick to your plan.
- Stick to your plan — Keep yourself accountable and remind yourself why you've decided to work on your debt.
12. Remit Your Payments Automatically
Arrange for automated payments for your debts to guarantee you never overlook a payment. Making payments on time is crucial for upholding a favourable credit record.
13. Avoid Taking on New Debt
Avoid taking on new debt whenever possible while working to eliminate your existing debt. This will prevent you from digging yourself into a deeper financial hole.
14. Patience and Persistence
Getting out of debt is a journey that requires patience and persistence. Commit to your debt repayment plan and celebrate each milestone along the way.
Conclusion
Getting out of debt is achievable with the right strategies and mindset. Creating a budget, prioritising high-interest debts, exploring debt consolidation options, increasing your income, and taking wise financial measures can pave the way for a debt-free future. Remember that every small step you take towards reducing your debt brings you closer to financial freedom.