How To Get Out of Debt? A Beginner’s Guide
Step-by-Step Guide to Getting Out of Debt. Is this something we need to address? There is nothing worse than being in debt. Not so many people end up in situations where their debt pile up and they struggle to pay off their debts. What makes it worse is that when you are in debt and you cannot repay on time, you get slapped with penalties and accumulating interest on your debt.
Call it a flaw in the system or our inability to manage our own personal finances, this problem exists and each year so many people have to face it.
In this article, we will try to look at a step-by-step guide to getting out of debt. It may seem difficult, particularly for those readers who struggle with an overload of debt. No matter how bad your situation is, you can get out of it and turn it around.
1. Make A Budget And Stick To It
Let us start with your step-by-step guide. Getting out of debt is difficult, it requires proper planning and execution. The ability to make plans and follow them is difficult, and this is the reason people end up with debt. Not all, but most people simply cannot manage their personal finances and thus end up being over-committed. Making a budget and sticking to it will always be the first step to get out of debt. Unless you control your expenditures, you cannot get out of the situation. The inability to control expenditure is the primary reason for indebtedness. Also, if without making a budget someone pays off their debt, they will end up with debt again. This is because they did not take care of the root cause of the problem.
So, approach the problem of debt with a strategy and your first step will require you to plan and stick to your budget. Cut down all the unnecessary expenditures to save up as much money as possible. If you have got a lot of debt, then you should ideally think like a FIRE enthusiast. Try to cut down as many expenses as possible and adopt habits that save money, for example shopping at thrift stores, reusing and recycling items instead of buying new ones. Also cutting down cable tv or subscription tv and using the internet to stay updated with all the news.
This will require a lifestyle change, but it has to be done to achieve your goal of getting out of debt.
2. Calculate Your Debt
If you have a single source debt such as mortgage or auto loan then there will be no need to calculate the debt. But for most people, this is not the case. Most people stack up loans from different sources and if you are in such a situation, then it will be wise to determine the exact amount that you owe to all of your creditors.
You may need to carry out some calculations or even contact your creditors or the exact breakups of value. Firstly write down all the different sources contributing towards your debt. You may have a mortgage, car loan, credit card debt, payday debt, P2P loan, a loan from friends and family members etc.
Simply list down all the different sources of debt and where possible to write down the amount you owe them with interest and the date by which you need to pay them back. You can follow the following format if you wish.
|Date||Principal||Interest||Amount Paid||Remaining Balance|
You will need to make a separate chart like this for each debt. I call this a debt amortization table. It will help you keep track of your debts as you pay them back.
For debts like credit card debt, you may need to contact your bank to ask them exactly how much you owe them and how much interest they will charge you each month on your outstanding balance.
This will give you an exact figure. For debts like mortgage and car loans, you will have a schedule of payments that the creditor/bank would have given you at the inception of the debt. If you have misplaced it or do not have it, then you can simply contact your bank for a copy.
3. Think How To Prioritise Your Debts
Once you calculated exactly how much you owe to each creditor, you need to rank your debts in the order of decreasing priority. The debts that have already accumulated penalties because of late payment should rank first. Credit card debt should also rank high because the interest charges keep adding to the debt for each month you do not repay.
Payday loans and P2P loans rank high because they carry heavy penalties and interest charges if not paid on time. Debts that carry a lower or no rate of interest should rank low. The point or rationale behind creating this priority list is to pay off high interest or high charging debts first.
Remember what we mentioned above, your strategy needs to be strong. Paying off high-interest debts first is the best strategy because you do not want these debts to keep on adding more interest charges. This is as you try to pay off your debt.
Some people suggest that smaller debts should be paid off first. It is to get rid of them quickly and build confidence. Well, this may sound good to hear, but it is not such a good strategy on paper. Paying off a smaller amount of debts will not work if the bigger debts like credit cards accumulate interest charges. Or equal to or more than the smaller debts that you have just paid off?
4. Negotiate Your Debts With Your Creditors
One of the key aspects of the Step-by-Step Guide to Getting Out of Debt relates to your negotiation skills. Once you have come this far and prioritised your debts, now you need to look at ways to negotiate with your creditors. This is to reduce interest rates or extend the time to repay the debt. You can do this in several ways.
You can contact your creditor and negotiate for a lower interest rate on your outstanding debt, tell your situation to your creditor. Creditors never want to lose their money, telling them your financial situation may help you because they will want to make sure they get their money back.
Even if it means increasing the payment duration or reducing the interest charge. What creditors will usually do is that they will extend the repayment time while reducing the interest. This will allow them to recover almost the same interest but over a longer time period. It totally depends on the creditor and how sympathetic they are to their debtors.
Second, you can attempt to convert your high-interest credit card debt into a low-interest credit card debt. This can be accomplished by using a balance transfer card but this will depend upon the discretion of your bank and their policies. Balance transfer cards carry low interest, thus making it easy for cardholders to pay off their credit card debt.
Another way to negotiate with your creditors is to go for debt consolidation. Debt consolidation requires merging different debts into a single debt with a lower interest rate with higher monthly payments. This, however, will have a slight cost because you will need a debt consolidator or debt manager to carry out the consolidation for you. What debt consolidators do is that they offer you a single debt repayment plan. The plan they base on your outstanding debts and then try to negotiate with your creditors on your behalf. They usually charge a fee for this work.
The benefit of debt consolidation is that you will get rid of all the different debts. You will only have a single amount to worry about. Your monthly payments may be higher, but you will get a lower interest charge on your debt. Having to deal with a single debt amount makes it easy for people to focus on getting out of debt.
5. Remember, Do Not Forget To Save
While this is not directly linked to paying off debts, it is a step which many people forget to plan for. Even If you are up to your neck in debt, you should not forget to save. Even if you can save only 1% of your income, do it! This is essential, why? You should change your spending habits to address the root cause of the problem. If you do not already have the habit of saving, then you need to work on it. This happens while you pay off debt. Yes, it is difficult to save when you have got a debt to repay. But this is the right time to start. You can save up while you are in stringent circumstances and surely save a greater amount once you are free of debt.
Another reason for saving and following the step-by-step guide is to create savings for emergencies. Most people become indebted because of emergencies. They either do not have enough savings or run out of them. Then have to incur debt to handle the emergency situation. Savings serve as a cushion from indebtedness. It is also important to invest your savings so that they keep generating returns on their own. It takes a long time for savings to churn out exponential returns. A journey of thousand miles starts with a single step.
Step-by-Step Guide to Getting Out of Debt, can we do it? So remember, if you are in debt, do not panic. You need to think with a clear mind and devise a strategy that will eventually make you debt-free. Just follow the steps we have mentioned above. If you discover something we have not mentioned then please let us know in the comments section. This allows everyone to learn from your experience.
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