Apr 20, 2018 / Money Tips
There’s something amazing about climbing a mountain—you work hard to get to the top where you feel an amazing sense of accomplishment, then you get to relax and enjoy an easy trip down the mountain. Getting out of debt is a bit like climbing a mountain in reverse. The easy part—the overspending—comes first and is followed by a grueling climb out of debt. And just like climbing a mountain, the only way to regain your financial freedom is to take small, methodical steps. The following six steps can help you make progress to that peak and, eventually, may leave you with that familiar feeling of accomplishment.
Sometimes chaos is the biggest barrier to getting out of debt. Increasing debt levels tend to overwhelm people, causing them to retreat into willful, blissful ignorance. Rather than face their grim financial situations, people often choose to ignore them. While it may be painful, the first thing you need to do is gain a full understanding of every account, every balance, every interest rate, and every payment deadline. This level of organization is necessary for making a strategic plan of attack.
As part of that plan, you may want to consider combining multiple debts into a single, low-interest debt consolidation loan. This can make it easier to stay organized and can reduce interest rates, slowing the rate at which your debt grows. But before you select a debt consolidation loan, be sure you’ll end up with a better interest rate and a payment amount that you can handle. Some people either prefer to carry multiple smaller obligations or can’t qualify for debt consolidation. If you opt not to consolidate, you’ll likely want to pay off your debts starting with the loan that has the highest annual percentage rate (APR), then moving down the list from there.
Whether you have one obligation or many, you won’t be able to get out of debt if you don’t change the habits that got you there in the first place. That means spending less—significantly less—than you bring in each month. Analyzing past expenses and establishing a budget for moving forward can get you most of the way there, but oftentimes, controlling your spending is a simple matter of willpower. Can you pack a lunch for work? Can you eat out less with friends? How about avoiding your favorite clothing stores and/or online shopping sites?
Getting out of debt requires a major shift in mindset and one the hardest habits to break is making the minimum payment. Most creditors require debt holders to make only small payments every month while charging interest on the remaining balances. It doesn’t take a math whiz to know that making minimum payments is not a good way to get out of debt. If you’re serious about eliminating your debt, you need to exceed the minimum requirements when making your regular payments.
While it may seem obvious, another great way to get out of debt is to increase the amount of money you bring in each month. If your debt problems are serious enough, you might consider taking on more hours at work or finding an additional income stream. Perhaps you’re due for a raise at work? If you can somehow increase your pay, resist the temptation to increase your spending and, instead, apply all of that increase towards your debt.
Of course, there’s another way to increase the amount of money available to apply to your debts—eliminate other debts. Once you pay off one obligation entirely, there will automatically be more money available to put toward your next debt. The key is to approach your debts systematically and to roll all additional money into those debts as it becomes available.
You may feel like you’re stuck under a mountain of debt right now, but by taking small steps and following the tips above, you’ll soon be feeling the sense of accomplishment that comes with total financial freedom.