If you’re faced with what seems like an impossible amount of debt right now, fear not. By following a simple and concise plan, it is possible to dump your debt and begin the process of building wealth and saving for whatever financial goals you might have. Today we share the 5 steps for getting out of debt, along with some extra tips to ensure success on your debt free journey. Enjoy!
5 Steps to Getting Out of Debt
Step #1: Assess your situation. This is often the most difficult part of beginning a journey out of debt. Often times people don’t know exactly how much they owe, and writing it all down on paper can mean facing a tough reality. Regardless, though, facing the reality of one’s debt load is the first step in achieving debt freedom. Make a list of each and every person you owe: mortgage loans, car and personal loans, credit cards, lines of credit, medical bills, loans from family members, and so on and so forth. List each debt in order from smallest to largest, and include the monthly payment, interest rate and months left to pay on the loan.
Step #2: Create a workable household budget. Write down every monthly expense you have, including:
- mortgage or rent payments
- loan and credit card payments
- grocery expenditures
- entertainment costs
- utility costs including digital tv and cell phone expenses
- medical costs
- clothing costs
- any other costs that you incur on a regular or semi-regular basis
It’s important to be honest and be realistic when creating your budget. If you’re budgeting $300 a month for groceries, but $600 closer to honest, you’ll likely fail at the grocery portion of your budget and then allow discouragement in. Start at what you really spend, and then look for ways to work the number down. Also, when creating your budget, don’t forget semi-annual and annual expenses such as car insurance. For those types of expenses, take the annual amount and divide it by 6 or 12, putting that dollar amount down as part of your monthly budget. A workable budget will create a plan for your money that will help you see where you might need to cut costs, and will help you find extra money to put toward debt payoff. I also encourage making room in your budget to put a small amount of money into an emergency savings fund each month. The more you have in an emergency savings fund, the less you’ll be tempted to start using credit cards again.
Step #3: Create a plan to pay off your debts. This might be the debt snowball, where you pay off the debts smallest to largest, adding each monthly payment to the next debt as you pay each one off, or it might be more of a debt avalanche, where you pay the highest interest loans first. I personally am a fan of the snowball, because it gives you quicker psychological wins, but each person/family/situation is different, and it’s important to do what’s best for you. It’s important too, when creating your debt payoff plan, that you keep your end goal of being debt free in mind and don’t allow yourself to get tempted to spend more as the debts go away. As you pay off each debt, commit to putting that new extra dollar amount to good use by using it to continue to pay off even more debt, knowing that the time will come to lighten up on the budget soon enough. Another key to a successful debt payoff plan is to use visual aids to encourage you and mark your progress, so that you can have regular reminders of your goals and the successes that are leading to achievement of your goals.
Step #4: Persevere. This is often the most difficult step in paying off debt. It’s easy to lose drive in a debt payoff journey if you:
- find yourself faced with financial emergencies that set back your debt payoff goals
- find yourself getting a little too comfy with your short-term debt payoff successes and get overconfident in what you’ve achieved thus far
It’s important to give yourself kudos on what you’ve achieved so far, but it’s equally important to keep your eye on the remaining debt and to not let it become “no big deal” as you watch the numbers go down. Some people like to treat their debt as an emergency and get rid of it ASAP, others like to take a slower “tortoise vs. hare” approach toward their debt, knowing that slow and steady wins the race. There’s no wrong way to get rid of debt, as long as you are truly committed to paying it down and becoming debt free. Commitment to perseverance is the key.
Step #5: Re-assess your plan regularly. Needs change, wants change, and as such, it’s important to re-assess your budget and your debt payoff plan every month or two. You may make changes, you may not, but you won’t know if you need to make changes unless you take some time to re-assess your plan and your budget and see how things are working. If you’re not taking time to check in with your plan and see if changes are warranted, you run the risk of feeling constricted by your plan, which increases the chances of you giving up altogether on your road to debt freedom.
Some extra tips that will help you achieve your goal of financial freedom?
- give yourself a small reward for each payoff success.
- educate and encourage yourself by reading debt success stories and personal finance blogs
- continually visualize what your life will be like when you “owe no man” and have a more comfortable money situation
- surround yourself with people who are supportive of your efforts
Reaching debt freedom is not easy. Paying off large amounts of debt takes emotional strength that is often unimaginable for people, but as the old saying goes,
A journey of a thousand miles begins with a single step.
Choose today to take that first step toward debt freedom, and then take another. Keep taking those small steps until you achieve your goals. It’ll be well worth the effort when you achieve debt freedom.
*Photo courtesy of Chris Potter