Billions of people and countless businesses are buried in debt. While most are trying, the majority cannot find a means of getting out of debt. The main reason for this is that most who are in debt don’t know the steps to take. They are trying different strategies but apply them in the wrong way. The result is that they get deeper into debt. If you find yourself in such a situation, here is a 10 step guide to pay off debt.
Step 1: Know why you got into debt in the first place
Majority of the people in debt are drawing an income. However, they don’t keep track of what they spend and, the reasons why they are in debt. In addition, they aren’t keeping track of what they are doing to clear off their loans. Realizing these will help in creating a plan to get rid of debt and achieving financial freedom.
The main reason why most people end up owing money is that they spend more than they earn. This doesn’t leave them enough money to pay off their debts, save and invest. Critically assessing your spending habits will shine a light on why you still owe others money.
Step2: Create a list of what you owe
Creating a list of all your debts plus their interest rates is a good way to discover what you owe at the current time. Having a clear picture of what you owe gives you the ideas to create a repayment plan.
Step 3: Create a repayment plan
A repayment plan is simply the blueprint you will need to get out of debt and remain financially independent. The main aspects of your plan include the steps and time you expect to take to clear off all your financial woes. It should also include strategies that will enable you earn more, save and invest for financial freedom.
Step 4: Get rid of the things you don’t need
Habits are usually the reason why most people get into debt. For example, you might have a gym subscription and rarely go to the gym. This means that you are needlessly spending money which would otherwise be freed up for debt repayment. Think about your credit card spending and the interest rates chargeable. If you have two credit cards, wouldn’t it be easier to have one with favorable interest rates?
Other things you can do include trading in some of your assets. For example, you can trade in your luxury vehicle for a cheaper one. This will get you extra cash that can be used to repay your debts.
Step 5: Get another source of income
If you work a nine to five, you can get a part time job. Rather than go home and watch TV, getting another job will give you more income. The extra cash can come in handy when you want to finance your debts fast. Another reason why getting more work in is that you will get extra cash that can be saved for emergencies.
Step6: Spend less
Having fewer expenses is the key to having extra cash that can be used to repay a loan. A great way of finding out what you can do without is creating your daily, weekly, monthly and annual expenses list. You will find expenses which, no matter how minute could stand in the way between your financial prosperity and remaining in debt. Think about that cup of coffee you always buy for a work colleague daily or, your monthly magazine subscription.
Step 7: Start saving
If you get a second or even third income source, then you will have enough cash to save. It might sound outrageous but people in debt rarely save. Without savings, you don’t have the money you might need to cover for emergencies, hence the need to borrow and get deeper in debt. Savings also provide extra cash that might be needed to finance pending loans fast. Remember, you don’t need to make large deposits to your savings account. A little money saved each month is all you need to start with.
Step 8: Pay off the debt with the highest interest rate first
Once you have your creditors list, you need to arrange the debts in order of priority. The debt with the highest priority should be the one with the highest interest rates. Clearing this debt fast will help you save more. The reason for this is that, the longer it will take you to pay high interest rates, the more money you will end up paying.
Another reason why it’s advisable to clear the loan with the highest interest rate first is that, once the loan is cleared, you can transfer the amounts payable to the other loans. As a result you’ll end up clearing your loans faster.
It’s worth noting that you should focus on clearing the high priority debt. However, ensure that you pay the minimum interest rates for the other loans.
After clearing this debt, you can now move to your second priority debt until you have cleared the lot.
Step 9: Pay more than minimum interest rates
If you have enough money saved, you can opt to pay more than the minimum interest rates on the due date. This has three main advantages.
First, you will be able to clear your loans faster. Second, it can help you improve your credit score. Third, you can leverage this and get better interest rates with your creditors.
Step 10: Invest your money
Once you have cleared your debts, you will have enough income and savings. Most people often forget the reason they were in debt that once they are debt free, they simply revert to their old habit of borrowing and spending more. It’s advisable to start investing your extra cash. This ensures that you have multiple income streams that will keep you debt free.
Getting out of debt isn’t as easy as it is getting in. However, with the willpower, motivation and drive to follow these steps, you can easily get out of debt and stay out of it within no time.