3 Steps You Can Take Today to Get Out of Debt
March 4, 2021
One of the most satisfying financial decisions you can do for yourself is to create a plan to get out of debt. The problem might be where to start. While it can seem overwhelming, you can take steps to make being debt free a reality.
1. Know where you stand
First, you need to know where your money is going each month. Start by writing down your income and all expenses, including current loans and credit card debt, then look over your recent financial statements to see where you’re spending other funds. This might include weekly lunches out, gym memberships, and subscriptions.
2. Establish a plan
Once you have determined your debts and current spending patterns, the next step is to put a plan in place to eliminate debt. Here are two ideas to do so:
- Snowball method: List all of your debts from the smallest balance to the largest. Then make minimum payments on all debts except for the smallest one, which you will pay everything you can towards until it’s gone. Once this debt is paid off, apply the same process to the debt with the next smallest balance, and so on.
- Avalanche method. Each month, pay as much as you can toward the debt with the highest interest rate, and the minimum on all other debts. Once the card with the highest interest rate is paid off, move on to the next debt with the highest rate, and so on.
3. Consider refinancing high-rate debt
Finally, if your credit score is a higher number or has improved, you may be able to save money by refinancing your auto loan or mortgage. Make sure your current loan does not have penalties for paying off the loan early, and that any fees involved with refinancing don’t add up to more than you would save on interest.
One more tip: start an emergency fund
To help reduce financial stress and keep you from adding more debt, an emergency savings account with enough funds to cover your living expenses for a few months is critical to financial security. A good rule of thumb is to have an emergency fund with three to six months’ worth of expenses.
A method to help you save consistently is to set up automatic transfers to occur every payday so that the money goes to loan payments or your savings before you have a chance to spend it.
Becoming debt free may seem like a fantasy. But, by taking steps to understanding your finances, establishing a plan to pay off debt, and making it a priority, your dreams may turn from fantasy into reality sooner than you think.
Tags: Money Management, Savings, Tips and Tricks