How To Get Out of Debt
Today we have a guest post from Dollar Diligence showing us how to get out of debt by using our planning skills! Read on to learn more.
**This post may contain affiliate links, which means we may receive a small commission, at no cost to you, if you make a purchase through a link.* For the full disclosure and privacy statement click here.
How to Plan and Organize Debt to Set Yourself Up for Repayment Success
It can be far too easy to rack up debt.
Getting out of debt, on the other hand, can be incredibly difficult.
Without a strategy and dedication, working your way out of debt can be quite the challenge. To be effective, you need a game plan, and you need to be organized. Read on to learn how you can formulate a well-crafted strategy to get out of debt once and for all.
- How to Start a Money Making Blog
- Plan Your Cheap Disney Vacation
- How I Earn An Extra $200 Dollars a Month
Make a List to Get Out of Debt
The only way that you can get organized and make a plan for how to get out of debt is by getting a realistic picture of exactly how much you actually owe. Being an ostrich might make you feel better in the short-term, but it won’t help you get your finances back on track.
Take an afternoon to sit down with your bills and make a comprehensive list of every one of your debts. Make sure to list everything that you owe, from student loans to car loans to your mortgage and anything that you might owe to the IRS. Write down what the interest rate is on each debt, and then order the list from the highest rate to the lowest. Now you are ready for the next step.
Reduce Your Interest Rates
Now that you understand what you owe on your debts and have a clear view of your interest rates, see what you can do about lowering those interest rates. The higher an interest rate is, the longer it will take you to pay off your debt. Lowering your interest rate by even a few percentage points could save you hundreds or even thousands of dollars — or pay off your debt much more quickly.
You can lower your interest rates in a number of ways: by refinancing a mortgage or student loan, by calling lenders to ask them to negotiate a lower rate, or by transferring a credit card balance to a card with a 0% annual percentage rate (APR). Once you have done this, you can re-order your list of debts, again with the debt with the highest interest rate in the top spot.
To Get Out of Debt, Make Budgeting a Priority
Although budgeting is necessary to a healthy financial life, many Americans do not perform this critical task. The process of budgeting involves determining how much income you have coming into your household each month and how much you are spending.
Make a list of your necessary expenses, such as mortgage or rent, utilities and food, and separate out the unnecessary expenses — such as going out to eat, buying new clothes, or even the cable bill. See what expenses can be cut so that you can devote money towards paying off your debt.
Budgeting — and sticking to a budget — accomplishes two important goals. Not only will it help you live within your means (therefore avoiding going deeper into debt), but it will also help you set and achieve financial goals. In this case, it may be paying off debt — but in the future, it might be buying a house, saving for retirement, or even taking a nice vacation.
Pay Off the Most Expensive Debt First
Once you know how much you can devote to paying off your debt each month, start by paying off the debt with the highest interest rate first. This is known as the debt avalanche strategy.
Put all of your extra money towards paying off that debt until it is completely paid off, and then use all of the money that you were using to pay off that debt towards the next debt on the list. Because you will now have more money available to pay off the next debt, it will be an “avalanche” effect, making it easier to get out of debt completely and saving you the most money on interest.
While it may be frustrating at first because it will take a while to completely pay off that first debt, the strategy will be worth it in the end when you pay less overall and are out of debt sooner than you would be if you used another method.
Last Words for Helping You Get Out of Debt
Getting organized and having a strategy is critical to getting out of debt. Listing out your debts and understanding how much you owe is just the first step in the process towards a debt-free life. By working to reduce your interest rates and sticking to a budget, you can pay off your debt and be on your way to a healthier financial life.