Get Out of Debt

Getting out of debt can feel like an overwhelming, hopeless task. In reality, it is quite possible with some concentrated effort. Many people have eliminated substantial debt in just a couple of years once they put their mind to it and made it a priority. Here are four tips on how to get out of debt.

Start with a budget

Get out of debt, Get Yourself Out of Debt—faungg (Flickr.com)

The only way to Get Out of Debt is to know where your money goes and develop a budget. There are two sides to budgeting… the first side is accurately tracking what you are currently spending. That means knowing where every penny is going. This tracking process helps you to realize how much you actually spend on necessities such as food, housing and transportation and how much goes toward frills like entertainment, Star Bucks and fast food. Once you know where you are spending money, it is easier to know where you can cut back. People are often amazed when they look at their actual expenses to realize how much money is spent frivolously.

The other side is developing a plan that matches your income with estimates of future expenditures so that spending will not exceed income. This plan is the actual “budget”. Budgeting takes extra time and effort, but without it you are just flying blind. It is easy to spend when you don’t set limits for yourself. But only the richest of people can live with no limits at all without getting themselves into debt. Some people with good incomes are able to just keep general guidelines in mind and stay within a general budget. But if you are trying to get out of debt you need a better more specific plan.

To Get Out of Debt You Need to Spend Less

It may seem like common sense, but the best way to get out of debt is to spend less money. Eat at home more often and spend less dining out. Carpool or walk to work to save on gasoline. Rent movies or see the matinée instead of paying full price. A simple rule to follow is to only purchase that for which you are able to pay cash. Instead of buying everything brand new, look for the possibility of purchasing the same item used. Automobiles are a prime example of a way to save money buying used. Cars depreciate just by being driven off the car lot, minimizing the value of your investment immediately. University students who buy used text books can save a great deal on school fees, etc.

Another Way to Get Out of Debt is to Earn More

Sometimes spending less money isn’t enough to get out of debt; you need to earn more. Find an additional part-time job or clean out your attic and sell some items, using the extra money to pay down debt. If you get a raise at work don’t raise your standard of living use the extra to get out of debt. Pay off your highest interest debt first. This will allow you more money toward paying off the next highest and so on.

Do the math

Credit card rates and interest rates on automobile loans are currently higher than any interest you will earn on a savings account available at a bank. Except for your emergency fund, it makes more sense to pay off debt rather than putting extra income in the bank. In the long run, you will save more in credit card interest payments than you could have earned with a savings account. Credit card companies know this (it’s how they make money) and will lure you by offering airline travel miles. This is fine if you pay off your card every month but these miles accounts frequently have higher interest rates than non-mileage accounts. One company owner failed to do the math because he “felt” like he was getting a free vacation every couple of years. In reality, he more than paid for the vacation in interest fees.

Take a Loan

It may sound a bit counter-intuitive to take a loan to get out of debt. But if you are currently paying high rates on a credit card, taking a lower rate loan can allow you to put that money toward paying down the balance faster. For example, if you’re currently paying 18% on your card and you take out an 8% loan from a bank, you can put that extra 10% toward reducing the principal balance. You might even get a 5% home equity loan and put 13% toward reducing the loan. In addition to reducing your interest payments drastically, another advantage of a loan over a credit card is that you have a set amount you need to pay each mont and you will have a target date of when you will be debt free.

There is a great freedom in being debt free; the albatross of monthly payments is gone and you are in control of your finances rather than your debt controlling you. It takes discipline and self-control to get out of debt, but the best things in life do.

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