Debtâ€”it seems to sink its claws into just about everyone at some point. From student loans and credit cards to car loans and mortgages, eight out of ten Americans have debt of some sort according to a July 2015 study from The Pew Charitable Trusts. Still, becoming debt free isnâ€™t impossible. In fantasy land, you might inherit a cool million from a long lost aunt thrice removed and voila, you have the windfall you need to eliminate your debts. But for those of us facing reality, fear not. These real-world steps will work for anyone who is on a journey to pay down outstanding balances.
Understand Your Numbers
Total up your debt
Before you can begin to slay your debt, it is essential to know exactly where you stand. While you are running the numbers, make sure you are clear on what debt actually is. Anything you donâ€™t own outright is a form of debt.
While you may have heard that mortgages are â€œgood debt,â€ you still will want to include it in your calculations. Once you are clear on what your debts are, grab a pen and paper, use a spreadsheet program or net worth calculators in free apps such as Personal Capital or Mint to total up all of your debts and to keep your balances all in one place.
Calculate the interest
Now that you know how much debt you have, you should look at how much interest is being charged on each account. Typically, your consumer debt from credit cards and student loan debt will have the highest interest rates. Depending on when you took out your mortgage or car loan, those rates may be significantly lower.
Figure out your expenses
Once you know how much debt you have, youâ€™ll want to know how much of your income and expenses are taken up by debt each month. To do this, you will want to track your spending for several months to understand your expense categories and determine an average amount of expenses. Then, use a budgeting spreadsheet Â you create or an online budget tool to stay on track.
Make a Plan
Choose a payoff method
With an understanding of how much debt you owe and how much interest you are being charged, you can now put together a payoff plan. Some people prefer to tackle their smallest loan first in the debt snowball method to build momentum, while others prefer to go after the debt with the highest interest rate in the debt avalanche method.
To make your payments pack a real punch, consider trimming back on some of your expenses. Cut back on happy hours to once a month. Ditch cable. Switch from your regular cell phone service provider to a low-cost carrier. Rein in your grocery bill by shopping sale ads and using up items in your fridge and pantry. After you have reduced your expenses, transfer that savings directly to your debt.
At this point on your journey, you have a payoff plan and youâ€™ve accelerated your payments by trimming expenses. Still, cutting expenses can only go so far, especially if you put your ramen noodle days behind you once you left college. Increasing your income by asking for a raise, creating side income streams, or even switching jobs can go a long way in paying down debt as long as you remember one key step: save, donâ€™t spend, the increase.
Create an Emergency Fund
You will also want to build up an emergency fund in a separate savings account. Baby steps are great. Set aside whatever you can spare, start small with $10 or $20 a week and work your way up to $50 or $100 a week. That way, if you are hit with unexpected expenses such as an illness or major car repairs, you wonâ€™t be tempted to swipe your credit card. After all, youâ€™re working on decreasing debt, not building more of it.
Find free activities
To sustain a debt-free lifestyle, you may want to add some frugal and fun activities to your week. Swing by your local library, not just for reading material, but for audiobooks, DVDs or museum passes. Spend more time in the great outdoors. Recruit your friends for game night or take turns hosting happy hour at home. There are countless ways to have fun without breaking the bank.
Start a side hustle
If frugal living isnâ€™t your jam, consider a side hustle or passion project to boost your bottom line. This side income streams could range from pet sitting or running an Etsy shop to tutoring or mystery shopping. Flexjobs.com, Upwork.com and Freelancer.com are just a few of the popular sites with listings where you can pick up part-time, freelance or â€œgigâ€ work. You have to pinky promise youâ€™ll bank your income rather than inflate your lifestyle. That way, when you dump your debt, itâ€™s the forever kind of breakup.
Living Debt Free
Itâ€™s no secret that many Americans feel like they are drowning in debt. In fact, many people accept it as a way of life. However, being debt free doesnâ€™t have to be a fantasy. If you are willing to manage your debt by understanding your numbers, making a plan and getting creative, these real world options will help you pay down your debt faster than you can imagine.
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