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September 14, 2018

How To Get Out Of Debt In 5 steps

Are you struggling to get out of debt?  It’s not just you.  Many people around the world fail to manage finances at one point of time or the other. It could be because of bad investment decisions. It could be because of unplanned expenses. Or it could be because of other mistakes.

If you are in debt, what should you do?

You don't need to worry. This article is just for you.

The Top 5 Tips to Help You Get Rid of Your Debt  lists the following five steps that can help you to get out of debt.

1. Manage Payments

If you are the type of person to look at your mounting credit card debt amount then you may be stressed out. Many people fail to pay their monthly credit cards, resulting in random payments without any particular strategy.

For instance, in the UK, 1.4 million people fail to pay their credit cards on time. Nowdays there are two methods that people use to manage their payments. They include the following:

  • Snowball method
  • Avalanche method

The snowball method was popularized by author Dave Ramsey in his book, "The Total Money Makeover."

The snowball method simply involves prioritizing your small debts first, regardless of the interest rate. Just like a snowball grows bigger and bigger you are going to watch your debts disappear. This is how it works:

  • Determine how much money you can pay for your debts each month.
  • List all your debts from the smallest to the largest.
  • For each debt, pay the minimum amount required except for the small debt.
  • For the small debt, dedicate as much money as you can afford each month. Continue doing this until it is completely repaid.
  • After it has been repaid, move to the second smallest debt.

This strategy can be very motivating. It will help you pay off your credit cards’ annual fees.

  • Avalanche Method

The avalanche method involves paying debt according to the interest rate. Mathematically, it is the best method to pay off your debt.

This is how it works:

  • You list your debts from the smallest to the highest interest rate.
  • Pay the minimum balance of each debt but dedicate as much money as you can to the highest interest rate.

2. Increase your Rate of Payments

If you decide to pay larger monthly payments then you are likely to get out of debt fast. Therefore you need to become more than "the minimum amount credit payer."

In addition, it helps reduce your debt to income ratio (DTI (News - Alert)).  Your credit score will rise with your financial lenders. In the long run, you can get another loan.

However, accelerating your payment doesn't have to work instantly. You can switch up one step at a time.  For instance, you can make weekly, bi-weekly or semi-monthly payments.

3. Avoid Impulse Spending

The momentary thrill of buying something that you don't need is a weakness. It is an attitude that you cannot shake off. This is what is referred to as impulse buying.

Impulse buying limits an individual in accomplishing their financial goals. However, if you discover how your impulse buying is triggered, then you can learn how to control it.

Impulse spending can be controlled in the following ways:

  • Create a 30-day budget list for big ticket items.
  • Avoid shopping malls unless you need essentials.
  • After accomplishing a goal reward yourself with a present. But learn to reward yourself with free gifts.
  • Avoid online shopping websites.
  • Have a plan for all your purchases.

4. Track Your Expenses

If you are trying to keep your finances in check, then always track where your money is going. The small expenses that you think do not matter can surprise you.

The following tips can help you track your expenses effectively:

  • List your regular monthly bills such as rent, car loan, cable, etc.
  • Track the money spent in a week on products such as groceries, gas, entertainment, clothes, etc.
  • Find strategies to save money.
  • Track your big-ticket purchases.
  • Have a plan.

5. Create a Spending Plan

A budget will give you a clear picture of how much you are spending and how much you are saving. The spending plan will help you achieve your long-term financial goals.

Creating a spending plan is very easy. You will need to:

  • Add monthly expenses.
  • Include your income after tax.
  • Subtract your monthly expenses from your income.
  • Account for your financial priorities such as mortgage, credit cards, loans, pension and emergency funds.
  • Adjust your spending according to your financial goals.
  • Reevaluate your plan each month.

It is important to focus on the basics. Remember, a life lived debt free is a life lived freely. You want to reach that stage as soon as possible.

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