You’ve decided to create a plan to get yourself out of debt, and that is commendable. It will take time and patience to reach your goal, but the results will be feelings of freedom and confidence.
There is an old saying that money makes for a bad master but a great servant. When you work to tackle your debts, you’ll gain an enormous power over your money. Here are three steps to follow in order to get started.
1. Create a Budget
If that sounds like drudgery or boredom complete with a dose of restriction on the side, it isn’t. You have to do this so you know where all your money is going each month. Each dollar needs to have its place and you are in charge of dictating where each dollar goes.
Figure out exactly what you need for every category of spending in your life. There are plenty of budget spreadsheets available online (Saveful has a free budget template you can try) to give you additional help. Figure out what you have coming in and what needs to go out for utilities, gas or commuting fares, rent, mortgage, car expenses, groceries and so on.
Whatever is left over should be divided up to cover the minimum of all your credit cards, student loans or other loans. The object of this game each month is to earn more than you owe, spend less than you allot for yourself and start knocking those debts out. A budget may take one or two – or more -drafts, but once it is done, you are ready to start getting out of debt.
2. Create a Debt-Reduction Plan
This is the step where you want to get all of your statements out so that you can clearly see the minimums due, the interest rate, and the balance owed. You have two choices for this step. You can either aim to pay off your cards or loans with the highest interest rate first, or your lowest balances first. The two approaches are sometimes referred to as the avalanche and snowball methods.
There is a degree of psychology involved in the second choice. Some people feel more empowered and excited when they actually get a bill paid off. This gives them more of a drive to keep the momentum up with the next bill and the next.
The choice to pay off high-interest-rate cards will let you save more money on interest sooner, but you will not get to enjoy the feeling of a small “win” as quickly. Do what feels most comfortable for you, for now. Once you pay off your first debt, take the same monthly payment and apply it to the monthly payment that you make to the next debt that needs to be tackled.
3. Revise and Renegotiate
You will want to revise your budget and pay-off plan regularly. Renegotiate interest rates with various creditors to help you save even more on interest rates to pay off bills faster.
These are supposed to be three easy steps, but remember, you did not get into debt overnight and you probably won’t get out of it overnight either. But, be patient and persistent and you can get out of debt.