As much as we all hate debt, most people have to admit that they have debt or have had debt at one point in time. Credit cards, student loans, car notes, overdrafts, personal loans, mortgages, etc are usually the big items in people's debt portfolios.
It's easy to get overwhelmed with so many bills to pay but the good news is that with changed spending habits and re-prioritizing your finances you can pay your debt off and have peace of mind.
Below are steps that will hopefully assist you on your journey to becoming debt-free.
1. Get radical about paying off your debt
Make a mental commitment to get rid of your debt as soon as you possibly can, think of it as a "critical" matter - you need it out of your life fast and under no circumstance should you apply for any new credit cards.
It's all about working on your mindset and you can do this by surrounding yourself with people and things that will keep you focused and motivated, even on the difficult days. Read books, watch videos (there's are a ton of great ones on YouTube), listen to podcasts, etc -your goal is to keep your head in the game.
2. Write everything you owe down
Visual representation of your debt is the most important step. This will give you an overview of all your debt in one place. Gather all your credit card statements, overdraft and loan statements, etc and write down the amount you owe for each one of these items along with their associated interest rate. At this point its also important to differentiate between good debt and bad debt.
An example of good debt is a mortgage. A home is an asset that could potentially appreciate in value over the long term despite the ups and downs of the real estate market. At the very least, if you pay off your mortgage, you'll end up owning your home outright.
An example of bad debt is your credit card, this is a liability. You’ve spent the money - it's gone - and you are left paying high interest on an item that’s probably not doing anything for you. Keep in mind though that debt is still debt, you are just prioritizing by moving the good debt to the bottom of your pay-off-list and putting the bad debt at the top of that list.
3. Get on a budget
The key to staying on top of your finances and actually getting to financial success is to live within a budget. A lot of people hate the word budget but it will keep you in check by helping you monitor your spending. A great tool for creating an automated budget is mint.com.
It connects to most bank accounts and will notify you if you are exceeding your spending limit based on any budget categories you might have set up. However, a simple excel sheet will suffice.
3. Put your list of debts where you can see it - every day
There’s nothing like a jolt back to reality when you are getting ready to go out and buy the latest platform shoes and you have your debt staring back right in your face on your bathroom mirror. Or have it on your phone screensaver that you'll see each time you need to make a call or reply a text. Having your debt listed in a place where you can see it every day will keep your mind on track.
4. Cut up those credit cards
So now you have your list written and posted in a place you’ll see it all the time. Why are those credit cards still in your wallet? You don’t need them. If you can't bear cutting them up, put them in plastic bag fill it up with water and put that bag in the freezer until you’ve paid each one of them off, never to be used again.
5. Start paying off your debt
The next and most important step is that you commit to paying off your debt - this goes back to getting radical! Grab that list of yours and start paying off your debts - check out the snowball method.
It's very important that you pay more than the minimum payments each month as minimum payments usually only cover the interest you owe and little or no principal. Your goal should be to pay as much as is feasibly possible to get rid of your debt ASAP.
6. Create an emergency fund
A lot of people think debt should be paid off before any savings begins because you might as well use that money you are saving to pay off your high-interest credit cards but I disagree.
I firmly believe that as you pay off your debt you should also start building a small emergency fund i.e. 50 - 100 dollars a paycheck until you get to $1000, so that if something comes up instead of turning to a credit card and increasing your debt all over again, you can turn to your savings to deal with your emergency.
A few things to keep in mind as you tackle your debt:
- Don’t be too harsh on yourself. Remember you now have an action plan.
- Make sure you distinguish between your wants and need and prioritize your cash allocations in budget according to that;
- While you pay off your debt, purchases of non-essentials should be put on hold as much as possible. It is, however. ok to treat yourself (within reason) every now and then as you meet your repayment goals - it's all about keeping yourself motivated.
- Don’t forget to put money aside in your initial emergency fund. Even if you can only afford a small amount. The last thing you want to have to do is rack up more debt is an unplanned situation comes up.
Here's to paying off your debt!