You might owe some money. Just a little bit. Nothing to worry about. Only a few thousand. Okay, maybe more than that. And it keeps getting bigger.
Sound familiar? It’s likely it does. Estimates of the average amount of unsecured debt people owe range from $4,000 to $17,000. That’s a lot of money. And after you’ve borrowed it, it’s hard to pay off. So what do you do? Here are five easy ways, and one hard way, to take a bite out of your debt.
Decide to Stop Spending
This is the hard step. You have to want to reduce your debt enough that you stop borrowing money to spend. You have to stop spending money on your credit cards, you have to stop financing vacations, you have to stop living beyond your means. That can be hard, but eventually, that money has to be paid back, and the more is owed, the longer that will take. So commit to minimal spending and get things under control at the earliest possible time: Right Now.
The first of the easy steps is to sit down and make a budget. Figure out how much money comes in and how much goes out. See where it comes from and where it goes, and how much of it goes to each item. Keep it real, don’t exaggerate your income or underestimate your expenses. This needs to be something you are able to stick to month after month. Once you’ve listed all your ins and outs subtract the expenses from the income. If there’s nothing left, or a negative, you are in real trouble and need to go to the next step and cut your expenses. For most people, there’s a little money left over. That’s what you have to work with to reduce your debt.
Hopefully, you made it here with a budget in hand and an idea of how much money you have to work with for debt reduction. Here’s the step where you increase that amount. Take a second look at that budget and think about needs and wants. What’s on there that you don’t need, only want? Do you use that gym membership? What about those premium cable channels? How often do you eat out? Can you cut back on these things? It’s likely you can. Take lunches to work instead of buying. Reduce or eliminate your cable bill. Borrow books and movies from the library. Find ways to reduce any of those budget items and add that money to your debt payments. You can even try to increase your income by taking side jobs. A little extra each month can really help.
Now that you have some money available to pay your debts, how exactly do you do it? How much do you allocate where? First off, always pay at least the minimum due. Missing payments leads to problems on your credit rating, late fees, and other issues. So plan to make the minimum everywhere. Whatever is left can be used in one of two ways:
If one of your debts has a higher interest rate than the others, paying it first lets you reduce the amount of interest you have to pay by eliminating the debt that will charge you the most. This is probably the most cost-effective long-term strategy.
If you have several debts with a low balance, it is both effective and emotionally satisfying to pay off the smallest first. Each one you pay off gives you a reward. You feel good that you are making progress. Also, you can now use the minimum payment that was tied up paying one debt to pay against your next target. Finally, it simplifies your situation by reducing the number of debts you have to keep track of. Maybe not the most effective tactic, but it does have some things going for it.
A possible short-term boost is using zero interest credit cards to stop your debt from increasing. These offers are usually limited time promotions, some with penalties at the end of the period. If you are sure you can pay the entire balance off by the time the zero interest ends, you can transfer the more expensive debt to a card like this and pay it off with no interest. But if you miss your goal, you now have another debt to pay. You should be extremely confident that you can pay this off completely or try another strategy.
A long-term boost for debt repayment is to refinance that debt at better terms and lower interest. Often called consolidation loans, you can move your debt from various scattered places and consolidate it into one loan. These are usually offered at good rates, certainly better than credit cards. You may have to arrange your own though. One way is to find an online lender for personal loans who will give you a good rate. Other options include refinancing your mortgage for an extra amount or getting a home equity loan. Loans involving your property as collateral are usually lower in interest but require much more paperwork to get. There may also be closing fees for some loans. Be sure your interest savings outweigh any additional costs.
Getting out of debt is possible, as long as you are willing to make some changes in how you spend your money. Keeping your expenses in check and using the money saved in your budget to pay down your debt will get you paid off eventually, but to do it fast requires real dedication and a willingness to cut your expenses to the bone. It all depends on you, how much you want to be debt free, and how fast you want it to happen. But you can do it and faster than you think. You just need to start. Decide to get out of debt. Then do it.
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