Charles H. Miller
Getting out of debt is something many Americans dream about. It is a daunting task, and you will have to know what you’re doing and avoid many temptations along the way to accomplish the financial freedom.
There are many useful content around the web on this matter; we decided to prepare a short list of steps anyone should take to repay their debt. Although it sounds simple — it’s a 5-step process — each of the phases outlined here comes with its own set of challenges. And you’ll need both the wisdom and discipline to go through the entire process. But we gotta start somewhere, right? So let’s roll…
Also read: 6 Ways to Motivate Yourself to Pay Off Debt
1. Stop borrowing money
You will want to make a conscious decision to stop borrowing money if you want to get out of debt. Don’t use debt to fund your lifestyle. If you want something, save for it.
No more buying everything with your credit card and carrying a lot of balance from one month to the other. You don’t need a new car every second year, and you don’t need all that clothes. The simple rule of thumb is — if you don’t have cash to fund the purchase, don’t buy it.
But first, you’ll want to save to get out of debt, and ONLY THEN think about acquiring new stuff.
2. Establish an emergency fund
This may have easily been our first point. Cause if you had that emergency fund, you could pay off the debt from it (though that’s not its best-use case).
You will want to have at least $1,000 put on the side to use it when the emergency strikes — cause sooner or later, an emergency will strike.
If you don’t have this money set aside, when you need it the most – you will have to once again use your credit card or get a loan. And that’s how the downward debt spiral begins (or extends).
In that sense the idea of an emergency fund is to act like a buffer between the urgent need and debt. When you have some money set in this fund, you can use it instead of a credit card.
Also read: 7 Frequently Asked Questions About Emergency Funds
3. Create a realistic budget and stick to it
The budget is a simple two column sheet — on one side you have “income” and on the other “expenses.”
Start by filling out your income and all the expenses you MUST pay, such as utilities, food, rent, internet access, and so on. Then add those things you can perfectly live without like gym membership, cable TV, magazine subscriptions and so on. While doing so, see where you can cut corners.
What you want is to have the biggest possible difference between income and expenses. You will have to make some sacrifices in order to pay that debt, but it’s well worth the effort. So do it.
Now come up with a realistic number how much you want to spend per month on other things like entertainment, dining out and so on. Depending on your existing lifestyle, you may have to make some serious adjustments. Or not. Heck you may need to get a second job to increase your income. With that in mind, you’ll want to check out the list of gigs we have prepared on this page.
The ultimate goal is to come up with a number that you can reach, every month.
Also noted: 5 Ways to Save on Your Monthly Expenses
4. Map your debt
Perhaps you don’t have just one debt to deal with. Perhaps you have a student debt, an auto loan and that credit card balance that keeps moving from month to month.
You’ll want to write it all down. Put it in a spreadsheet or on a piece of paper. Next to the debt write down the amount owed and the interest rate you’re paying.
From there you could either start by paying off the smallest debt and go towards the largest one. This will help you build momentum.
Or, you could start with the debt with the highest interest rate. This approach makes most sense math-wise, but it’s not necessarily the easiest one as the debt with the highest interest rate can take a few years to repay.
Alternatively, you may want to opt for some hybrid solution where you would first pay off the smallest debt and only then go for the one with the highest interest rate. It’s your money, and it is you who must make this decision.
5. Put any excess cash towards debt repayment
Any extra cash you earn from, say, a second job, selling a car, an inheritance, or any other form of income should go towards the debt repayment. You could save a little extra by being more frugal and at the end of the month, you’ll have more cash on hand — make sure that money is used to repay the debt.
It is actually pretty simple — the more cash you can put towards your debt, the faster it will disappear. But it’s easier said than done, and repaying most debts takes time. Again, we can hardly imagine a better way to invest your time than to “go debt free.”
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Your turn…
Getting out of debt should top your agenda. Develop a plan, start saving, take an extra job, and follow through.
If you’ve repaid your debt, feel free to share your two cents in the comments form below. We are always on the lookout for useful advice.
Or if you’re still struggling, tell us about your challenges. Perhaps we or some of our readers may offer a tip that could help you out. Let’s get things rolling…
Also read: 5 Major Mistakes to Avoid When Starting to Save Money
