Achieving financial independence should be everyone’s goal. No matter your current financial situation, you can achieve financial independence. Yes, you can create a last-longing wealth. This applies to you even if you are in serious debt. The starting point is to have the will power and the discipline required. This involves paying yourself first and having a working budget. If you are in debt, one of your goals should be to be debt-free and you can start today. In this article, we will show you how to get out of debt.
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1.0 Identify your debts
Once you make up your mind, the journey becomes easier. The next critical step is to identify what you owe. If you are keeping a money diary, you will be able to identify everything you owe. From your money diary, create a list of all your debts. Your list should include the following:
- total amount you owe
- minimum monthly payment
- interest rate
You have to do this for everything you owe including the following:
- credit card balances
- line of credit balances
- mortgages (if applicable)
- car loans (if applicable)
- unpaid utility bills (cell phone, hydro, cable, etc.)
- student loans (if applicable)
- loans from friends and family
- spousal support and/or child support you owe (if applicable)
At the end of this exercise, you will have clarity on your debt profile.
2.0 Review your budget
Once you identify your debt profile, you need to review your budget. If you don’t have a budget, you should create one immediately. A budget is a plan that helps you manage your money. To learn more about what a budget is and how to create a budget, check out our previous article on budgeting.
3.0 Have a strategy
To achieve any objective, you need to have the right strategy. The same applies to getting out of debt. After you have created a list of all your current debts, create a plan. The types of debt and the amount of debt you owe will affect your strategy for paying them off. You will find below some of the things you should have in your strategy.
3.1 Decide on the time-frame
Set a payment time-frame that is reasonable and that will not put too much strain on you. There is no point having a plan which you can not achieve. Having a long time-frame may make you lose focus. In addition, you will end up paying more money in interest. However, if your time-frame is too short, you may put unnecessary strain on yourself.
3.2 Identify the debts to pay off first
Irrespective of the type of debts you owe, you need to decide to pay off certain debts first. If you are not sure of which to pay off, see the suggestions below:
- Debts with high interest rates
- Debts with the lowest balance
Paying off your debt with the lowest balance may help you to feel the accomplishment of paying off a debt sooner. This can keep you motivated to maintain your goal of becoming debt-free.
3.3 Pay back your family or friends
If you have a personal loan with family or friends, have a conversation on how you intend to pay back what you owe. Then, commit to a payment schedule that you have agreed with them. One way to achieve this is to set up automatic money transfers in order to stick to the payment plan. This will also show them that you are committed to repaying them.
3.4 Negotiate a new payment plan with your financial institution
One other critical task is to have a conversation with your financial situation with them directly. The focus should be to renegotiate your loan terms. Depending on the financial institution, you may be able to get the following:
- a lower interest rate on your debt
- extension to your payment time-frame
- consolidate your debts into one loan
4.0 Consolidate your debts
If you have multiple loans, one of the things your can do is to consolidate your debts. You should discuss this directly with your financial institution. You may consider applying for a loan or line of credit to pay off multiple debts with high interest rates. Consolidating your debts means you will only have to make one monthly payment rather than paying each of your debts individually.
5.0 Resist the temptation to take on more debt
Once you have started on this journey, resist the temptation to take on more debt. If you continue to spend more than your income, it will be difficult to become debt-free. So, track your expenses and block the leakages. If you are finding it difficult to resist the temptation, follow the suggestions below:
- Review your budget to reduce spending. You need to have a budget to be able to do this.
- Reduce small and recurring expenses
- Pay yourself first and put it in high yield saving or investment account
- Keep your credit card in your wallet. To avoid getting into more debt, use cash or debit instead of your credit card.
- At all cost, avoid “buy now, pay later” offers
- Reduce your banking fees. You can easily achieve this by using ATMs from your own financial institution.
6.0 Get help
If you follow the steps above and you are still having trouble paying down your debt on your own, it may be the time to seek help. You can get help from the following:
- an accredited not-for-profit credit counselor
- a financial advisor
- a Licensed Insolvency Trustee
These people can work with you to achieve the following:
- review your current debt situation
- determine your present and future needs
- make a budget and
- find ways to pay off the debt