A 5-step Plan to Getting Out of Debt
Debt, in general, isn’t really bad. There is good debt and bad debt – you just have to know the difference. Not everyone is blessed with large coffers (or as the British say “with a silver spoon in ones mouth”), and thus the need to obtain the help of financial institutions through loans and other borrowings is part of lifes journey.
However, these debts can become a problem if they get out of hand and/or used in a way that is not used to create wealth. For example acquiring debt to help meet the monthly shortfall in income or to pay for holidays or consumer goods often leads to a very slippery slope that many find difficult to get off
So if that credit card debt is starting to mount and you are finding it difficult to make ends meet what can you do? How do I get out of debt?
Here are some possible steps you can take:
Accept there’s something wrong.
The first step in learning how to eliminate debt is to recognize the problem. The longer you are in denial, the bigger the problem will become. After all, how can you ask for any kind of help or take the necessary actions if you don’t think there’s a problem in the first place?
But how do you know there’s something wrong? One of the tell-tale signs is when you dread the arrival of the monthly credit card statement. It indicates two things. First, it’s probably being used too often and second you are not keeping on top of what is going onto it. Credit cards are an easy way to spend as you don’t feel the pain right away. But unfortunately are also one of the most common ways of getting into financial trouble.
Focus on paying off debt.
Forget about savings for a bit – I know, a little unconventional. But the savings can wait. Your mounting interest bill, late fees, and other additional charges can’t. Once you’ve seen the problem, take some steps right away. Start paying as many of your debts off as soon as possible. For your credit card repayment, strive hard to pay for the entire amount due. But assuming this isn’t taking place and hence you are reading this article, make sure you are at least making the minimum payments each month – this will at least mean you are not being hit by the late fees..
The next step is to list the cards in order, starting with the one with the highest interest rate first. Over pay what you can on this one first. Once that card is paid off, start on the next one and so on. Although it may take some time, perhaps some years, this approach will make a significant difference on the amount of interest you are paying. And this in turn will mean you starting to free up cash each month that can be used to repay even more debt – and so the cycle continues.
Remember, you got into debt over a period of time – so it’s going to take a period of time to get out of it.
Be open to the different options.
There are many ways in how to repay debt, and you can choose one or combine a lot of them. For one, you can approach a financial counselor who can provide you with financial counseling advice. If you want to save on their services, look for one who works for your community, often funded through a local, state or federal agency. You know that their pay doesn’t depend on recommending certain debt management services that may not be suitable for you
You can also opt to consolidate your loans or, if you’re eligible, apply for a secondary mortgage and enjoy lower interest rates and longer payment terms. Moreover, be brave and talk with your creditors. Try to negotiate loans with lenders and credit card companies. And be weary in that even though you may enjoy a lower interest rate you can end up paying more interest over the life of the debt as the term of the debt is longer. But this does provide a short-term means of freeing up cash flow for debt repayment.
If you have already started paying off your loans, and you’re already on the right track, it’s time to go back to savings. Normally, you need to save at least 10 percent of your total income, but if you’re still busy paying off loans, just try to keep whatever amount you can. The most important thing is you have something for the rainy day. Something that to start with will provide that financial buffer for when the unexpected bill comes along or there is a disruption to your regular income. You can also look for banks or credit unions that offer competitive interest rates for your savings account.
As a guide to start with, the rainy money balance should be built up to provide you and your family with at least six months worth of funds. Calculate what your family needs to spend on the essentials each month, multiply it by six, and that’s your rainy day money target.
Believe you’re on your way to financial freedom.
Getting out of debt isn’t a walk in the park. You’ll go through many bumps along the way, some of which may entice you to just give up and worse declare bankruptcy. A change of mind-set, therefore, is also necessary. Try looking forward to the financial freedom you’ll enjoy later, so you’ll be motivated to work hard today. Keep those goals and dreams in mind and realize that the financial plan you are working with can provide you with the means to achieving them. Achieving these goals and dreams is not about a one-off event but rather a process, just like money management. By taking proactive regular steps towards what you want to achieve you will succeed because the habits and behaviors required are learnt along the way.