You get into debt by spending. You get out of debt by not spending. Well that plus a bit of planning on how to maximize what money you have available to pay off your debts. The first thing to do is to stop getting farther into debt. Here are 4 easy steps you can follow.
Pay cash for everything possible
If you use credit cards, the temptation is there for you to overspend. By using cash, you can not spend more than you have. And you physically see the money leaving your hand which has a bigger impact on you than swiping a card for a virtual money’ transaction.
Get a check card
When you can’t buy something with cash, this is the next best thing. These check cards are accepted just like credit cards, but they use the money that’s in your checking account. This prevents you from overspending.
Use a budget to track your spending
There’s that awful B word. A budget is a tool to help you track what you spend, and to plan limits on your spending. Tracking your spending is something everyone should do, and it’s painless. The limits on spending are what people don’t like, but that is what gets you into debt in the first place. Once you track your spending for a while you know your total spending in a month versus your total income. If your spending is more than your income, you are in trouble and need to cut back a lot on your spending immediately. But if your income is more than you are spending, that means you are ahead of the game and you can use a budget to save even more.
Use a budget to set limits on you are spending
Once you know how much you are spending on various types of things like utilities, entertainment, and food you can create a budget to help limit your spending. You can set a budget for just one area if that’s all you need for example if you are spending too much on eating at restaurants, you can limit your spending on meals out and just eat at home when you reach that limit. Your goal here should be to free up as much money as you can that you can apply towards paying off your debts. Aim for a minimum of $100 a month.
You have effectively frozen how much you owe on your debts. It’s time to make a plan to help you pay your debts off faster. Here are 4 steps to help you make your plan.
List all of your debts
Knowing how much you owe and to who is the first step. Make a list of all your debts. Include information like who you owe the money to, how much you owe, what the minimum payment is, and what is the rate of interest. Don’t forget to include all debts here, even money you owe friends and family and their terms.
Prioritize your debts
You will make at least minimum payments on all your debts. However, to pay off your debts you need to accelerate your payments. The best way to do this is to pay off your highest interest debt first. Generally this is credit card debt, especially department store credit cards. These cards can have interest rates of 25% or higher! By paying down these debts first you will save these larger interest payments. For example if you have two loans for $1000 with one at 10% and one at 5% interest, they will cost you $100 a year, and $50 a year respectively. If you pay off the 10% loan first, you will be saving twice as much on interest payments. That is money you can use to pay down the 5% loan even faster.
Always pay off the highest priority smallest debts
Small debts are faster to pay off. The money you use to pay those old minimum payments and interest with can now be applied to the new highest priority debt. You can see how the more debts you pay off, the faster you can pay off the next debt. To illustrate this, let’s say you have $100 a month free to reduce your debt. You have 3 debts each for $1000 that need each take a minimum payment of $50. It will take you 10 months to pay off the first debt (assume that $50 matches interest exactly). When you do, you free up that extra $50. Now you have $150 free to pay down debt #2. You can pay it off in less than 7 months. Now you have $200 free to pay down the last debt in 5 months. See how each debt was paid off faster than the last one because of the extra money that was freed up? It only took 22 months when it looked like 30 at first that’s 25% faster than expected!
Keep a record of debts you pay off
There is nothing more motivating that paying off a debt, unless it’s paying off your last debt. In addition to motivation, you will have a tool to help you resolve any problems you might have with loan or credit card companies. Its also useful for debts you pay off to friends or family members since often these debts have no paperwork and can easily be forgotten or mixed up.
That last example might have scared you. Yes, it will take time to get rid of your debts. The more money you owe, the longer it will take. That is why it is very important that you not add to your debt, and that you free up as much money as possible. These two things will help you pay off your much faster than otherwise.