You're ready to finally get out of debt, but you may be wondering how to get started. What should you do when you're in financial debt?
Many people struggle to find the right answer to this question. When you've been in debt for a while, it might be difficult to know what to do and where to begin. Or, you may know what you need to do, but lack the motivation or willpower to follow through.
It's easy to get overwhelmed by financial debt, but it doesn't have to be that way. Here are six simple steps to pay down your balances and achieve financial freedom.
It All Starts With a Plan
You need a plan to get out from under the weight of your debt. During your journey to get out of the red, it's important to remember to take it one step at a time.
1. Make a List of All Financial Debt That You Have
Don't leave anything out, even if you think the balance is too small. In your list, include the name of the lender, the balance, the interest rate, the due date, and the minimum monthly payment.
2. Make a Plan for Paying off Each One
Instead of winging it and paying random amounts here and there, you need to set up a plan and stick to it. Financial expert Dave Ramsey recommends two methods: the snowball method and the avalanche method. Both work well; it's a matter of preference.
- Snowball Method. Make a list of all of your debts, going from the smallest balance to the largest. With the snowball method, you will pay off the lowest balance first, while making the minimum payments to all other loans. After the lowest balance has been paid in full, take the money you were paying towards that now-paid-off balance and add it to the regular payment amount of the next lowest loan balance.
- Avalanche Method. Instead of going from the smallest to the largest balance, you will first pay down the balance with the highest interest rate. Just as in the previous method, once you pay off a balance, add that payment amount to the next loan's scheduled payment.
3. Set up Automatic Payments From Your Checking Account
That way, you don't steer from your plan. Set it and forget it.
4. Don’t Miss Any of Your Payments
Why add fees and additional interest to your debt when you're trying to pay it off? That will just slow you down, not to mention hurting your credit while you're at it.
5. Make a Budget to Tackle Financial Debt
If you don't know what's coming in and going out of your bank account each month, how will you know what you have leftover each month for your repayment plan?
The first step to creating a budget is to start tracking your spending and determining where all of your money is going each month.
A budget allows you to see where you can cut expenses and how much income you have leftover once all necessary spending has been deducted. Review your expenses and see if you can eliminate any of them, or at least minimize the amount of non-essential spending. That allows you to free up additional funds to use towards paying off your balances.
Paying down serious debt requires making serious choices.
6. Find Ways to Increase Income
Sometimes cutting expenses isn't enough. In that case, some options for additional income are:
- Taking on more hours at work
- Starting a side hustle
- Selling items that aren't crucial to your life right now
Learn More About Paying off Your Financial Debt
Once you've decided to pay off your debt, it can be incredibly liberating to make progress towards your goal.