How to Get Out of Debt in 5 Steps
Many people don’t realize how quickly debt accumulates. You may feel that you won’t make any progress if you have high-interest credit card debt. If you do things right, it is possible to get out of debt much faster. You could also save significant money. These are five ways to pay off debt.
Important points to keep in mind
- It can be overwhelming to pay off debt, but you don’t need to if there is a plan.
- The first step is to know where your money is right now. This will allow you to cut back on unnecessary spending, and use the money that is available to repay the debt.
- Start with the best debts to save money and make your debts pay off faster.
- A consolidation loan may lower your interest rate.
1. Make a budget
You might not be able to see if your spending is higher than your income if you don’t have one. Although it can seem tedious, budgeting can be an effective tool to manage your money and plan for the future. You can use budgeting apps such as Mint, You Need a Budget or PocketGuard to plan your budget. However, you can also make an effective budget with a simple notepad and pen.
Start by listing how much money each month. Include income from work and other sources.
Next, list all your fixed recurring expenses. In this section, include your rent, mortgage, utility bills and insurance premiums. Find out how much you spend on entertainment and dining out.
Look for ways to cut down on spending if you are spending more than you make or if you don’t have enough money. Take, for example:
- Carpooling: If your commute is long, find a colleague who lives nearby and offers to carpool. To find a rideshare partner, create a RideShare.org profile. You can save money on gas and car maintenance by sharing your ride.
- Make a grocery shopping list:While cooking and eating at home are great ways to save money, it’s also a smart idea to make a list of what you need to buy and to stick to it.
- Reducing streaming services: If you have multiple streaming services, choose one or two and cancel the rest.
- Switch to new mobile plans: If you are on a high-end plan, you might be able to upgrade to a lower version from your provider. You can also shop around for a lower plan.
2. Increase your income
There are only so many corners that you can cut when it comes to reducing your expenses. Once you have created a budget, and eliminated some expenses from your budget, the next step should be to increase income. You might be able to make extra money by using your skills if a promotion or raise is not possible.
You might also consider changing your workplace withholding tax. You may be withholding too much money if you get a tax refund every year. This could help you pay off your debts. To reduce your withholdings and increase your take home pay, ask your employer to provide a W-4 form. If you don’t get your tax refund, use it to pay off the debt.
3. The debt avalanche strategy is a good option
Once you have the money you can use to pay off your debts, you must decide how to best use it. For many, the debt avalanche strategy is the most efficient tool.
The Debt Avalanche method allows you to make a list all of your debts and rank them from those with the highest interest rates to those with the lowest. You continue to make minimum payments on each account and then you transfer any extra money into the account with a higher interest rate.
Switch to the next highest rate account once your highest-interest debt has been paid. Keep going until you have paid off all your debts.
You’ll pay down the highest interest debt first and will save more in total interest.
4. Consider debt consolidation
Consolidating debt can speed up repayments if you have high-interest debt. You can consolidate your debt by taking out a personal loans from a bank, credit union or other reliable lender. This loan will be used to pay off other debts. You will now only have one loan and one monthly payment to manage.
You may also be eligible for a consolidation loan with a lower interest rate than what you paid for your old debts if you have excellent credit or a friend or family member with good credit. This loan can be used to pay down your debt quicker and help you save money over the long-term.
Investopedia regularly updates its lists of the best debt consolidating loans.
Not only will you save money on interest but it is also easier and more affordable to borrow money in the future such as a mortgage. A mortgage or car loan. It lowers your credit utilization, which is an important factor in calculating credit score.
5. Keep track of your progress
It takes time to get rid of debt. You can stay focused by tracking your progress at regular intervals such as weekly and monthly checks. A visual or spreadsheet of your progress can help you remember what you have accomplished and the goals that you want to reach.