How to get out of debt
Debt is one of the worst nightmares we can imagine — and no one would ever want to be in this kind of situation. Debt is one of the most common roadblocks which keeps people from living a comfortable life. That is why it is important for you to get away with it as soon as possible.
Many people think that getting away with debt is an impossible way to achieve. False. There are so many people who are getting out of debt every single day, and if they can do it, so do you. It might be a hard process to take — but possible.
Be worry- and debt-free by following these five-step, get-out-of-debt checklist that can help you to be ready to get on a path to financial freedom.
1. A change of heart.
Having the right mindset and committing yourself to get out of debt is the first and the most important step to take before anything else. You have to kick your borrowing habit and make a conscious effort to stay away from the temptation to have a debt-free lifestyle that you are dreaming of. Say goodbye to credit card sign-ups, test driving a car that you can barely pay and buying things that you cannot really afford. It is the harsh truth but this will help you focus your mind merely on the debt that you currently have and your strategies on how to pay it off quickly.
2. Find out how much debt do you have.
Listing down all the money you owe and who you owe to is one of the success factors in paying off your debt. Make a list of all your debts and format it like the table below — Name of creditor, original balance (or the total amount you owe), total amount paid (or how much you have paid so far), minimum monthly payment, months to pay off and month paid off (or when can you totally finish paying off the debt). Doing this allows you to be aware of how much debt that you have and that will help you to create a strategic plan on how to settle them.
3. Plan your strategy on what to pay first.
Once you know exactly how much money you owe, it’s time to come up with a plan of attack. Plan your strategy carefully by prioritizing which of your debt you are going to pay first based on their interest rates — is it your credit card, car loan or housing loan? Consider using the debt-snowball method to speed up the process. A debt-snowball method is a debt reduction strategy where you pay off debts in order of smallest to largest, gaining momentum as each balance is paid off. To apply this method, list down all the money you owe from smallest to largest and set aside your fund at the smallest balance while making minimum payments on bigger loans. Once the smallest loan pays off, put aside the extra money to the next smallest debt until you pay that one off. Repeat the process until you are finally debt-free.
It is like building a snowball on the backyard — it starts from a small snowball and once you start rolling it to the yard and gains momentum, the snowball grew into something more like a snow boulder. This “snowball effect” allows you to ditch the smallest debt first and experience few “wins” as you pay off debt and as you go along — which will motivate you more in paying off the largest loans for last.
4. Ditch those expensive habits and use excess cash to pay off debt.
In order for you to totally pay off your debts, it will be wise to track your spending as it tells you where your money is going. In this way, you will have an idea on your money spending habits and properly evaluate whether those purchases you’ve made are worth it — and come up with ways to eradicate them or at least minimize them. If you have a smoking or drinking habit, quit it now as it would do more harm than good. If you tend to have a habit of eating out on a restaurant during lunch breaks, the best plan of attack is to eliminate this kind of behavior or have a cheaper alternative like bringing packed lunch to your workplace. Determine what your expensive habits are, cut those away and use your excess cash to help you pay off your debt.
5. Monitor the progress.
Once your game plan is set and you started to pay off your debts, continue to monitor it closely and make sure that you are making a progress. Continue to stick with your plan until your debt is paid off. Always remember why you started in the first place and let that motivate you to achieve a debt-free lifestyle.
The Bottom Line
Getting out of debt is not an easy process. Like losing weight and getting fit, eliminating debt takes a lot of hard work and discipline. Keep in mind that whatever debt you might have, there is always a way out. It might not happen overnight but creating a plan and sticking to it will help you walk towards a debt-free future. Above all, clearing debt also means changing your habits and behaviors so you can achieve your financial goals.