Debt comes in many shapes and guises, from credit cards and overdrafts, to loans and mortgages. What all have in common is that they allow people to buy now, pay later. This is not necessarily a bad thing but does require individuals to be disciplined in how they manage, minimize, and pay off their debt. Sadly, however, debt can quickly spiral out of control, leading to a myriad of negative consequences.
To illustrate the scale of America’s debt problem, it is estimated that total consumer debt (excluding mortgages) was $2.6 trillion in 2007, which worked out at “nearly $8,500 for every man, woman and child that lives here in the US.” (1) The onset of recession simply made things much worse and has further highlighted the importance of eliminating debt.
There is no magic bullet to eliminate debt, and at the outset, it may look a daunting task. However, it’s helpful to compare it to climbing a mountain. The peak isn’t reached in one leap; instead it’s tackled one step at a time.
With this in mind, here are five steps to eradicate your debt:
Step 1: Take stock of your position:
Extending the mountain-climbing analogy, a climber must always be aware of their starting position relative to their goal. Then, with a compass in hand, they can plot the optimal route.
From a debt elimination perspective, this means you need to know how much your total debt is, and what its composition is. Create a spreadsheet showing how much debt you have on credit cards, overdrafts, and loans, and the associated interest rates and fees.
As well as identifying your debts, you should also review your overall finances. Viewing bank statements should identify opportunities to cut costs and free up more money.
Step 2: Reduce costs and change spending habits:
Imagine you’re stuck on a boat that’s leaking. Your first task is to stop the leaks. Only then can you focus on rowing for shore. The same applies for getting out of debt. You’ve got to address the spending patterns that got you into trouble and free up more money to pay off your debt. This might include cutting back on some of life’s luxuries, but it will be worth it in the long run.
Step 3: Focus your efforts on your most damaging debt:
If you have two credit cards and one is charging 5% and the other 20%, then it doesn’t take a financial genius to realize that paying off the 20% card first will be advantageous. Having already identified all the debt that you have, it should be quite easy to work out which of your debts to prioritize.
Unauthorized overdrafts are very damaging as they attract hefty bank fees and high interest rates. Therefore, getting your debt back within your agreed overdraft limit is essential.
Credit cards are a cause of huge distress for some individuals, particularly where their debt has reached such proportions that they can only pay off the interest each month. It’s vital that you don’t fall into this trap and that you make strides to paying off the capital sum as well as the monthly interest.
Personal loans tend to have lower interest rates than unauthorized overdrafts or credit cards. Therefore an option to consider is consolidating overdraft and credit card debt onto a personal loan. This should immediately reduce your monthly interest payments. However, this advantage has to be weighed against the fact that loans tend to have less flexibility in terms of varying monthly payments.
Mortgages differ from all the other categories of debt in that they are secured loans. This means that if you default on your mortgage, you risk losing your house. For this reason, meeting your mortgage commitments is normally the highest priority. You can then decide how to tackle the remainder of your debt commitments with any money that you have left over.
Step 4: Monitor your progress
The key to eliminating debt is to be methodical and maintain momentum. To guard against reverting to bad practices, keep a month-by-month record of how much debt is left and how much you have paid off. Incorporating this into a monthly budget plan will ensure that paying off your debt remains at front of mind.
Step 5: Make being debt free an attitude
Those people who are best at managing their finances don’t need to consciously think about avoiding debt. Instead, it’s something that they instinctively do. They may only maintain one credit card, for example, and only use their credit card as a last resort.
Such thrifty behavior won’t come naturally to all of us. However, the more we get into a routine of avoiding debt, the easier such behaviors become.
For further guidance, check out the debtliberty website, http://mydebtliberty.com/