Are you unsure of how to get out of debt? You’re not alone. Canadians owe an average of $1.74 of debt for every dollar of disposable income. That can be fine as long as nothing goes wrong. However, if you have a financial emergency, you can find yourself struggling to make your monthly debt payments.
In this article, we see how to get out of debt following four steps, mistakes to avoid when trying to reach debt freedom, and making tough decisions when it comes to your needs and wants.
4 Steps to Help You Get Out of Debt Sooner
Debt can be a scary thing and cause you a lot of stress, but it doesn’t have to be that way. There are several things you can do to correct your financial situation and get your economic life back on track. By following the steps outlined below, it will go a long way to helping you get out of debt sooner.
1. Figure how much you owe
Begin by figuring how much money you owe. This includes credit card debt. You can do this by adding all the totals from your statements. Once you come up with one figure, pat yourself on the back, as you’re one step closer to being debt-free.
2. Getting organized
List your debts. You can organize them by amount or interest rate from largest to smallest. Choose a payback method that benefits you the most. Usually, it makes sense to pay off the debt with the highest interest rate first, the Avalance Method. The psychological thrill of the Snowball Method to pay off the smallest amount first may be more beneficial if you have many accounts. Either way, be sure to make at least the minimum payment on all of your debts so that your credit remains in good standing.
3. Look at where your money is going and where you can save money
When you take the time to figure out where your money goes, you may be surprised to learn that there are dozens of expenses you can get rid of and still manage to get by. Review your bank account and credit card statements to find these expenses.
Saving money is only one part of the equation. Boosting your income is another way to reach debt freedom sooner. Part-time jobs can be an excellent way to earn some extra cash to pay off debt. Just make sure it doesn’t interfere with your full-time job. Otherwise, it may not be worth it.
4. Consider seeking help from a credit counselor
If you’re still finding it tough to keep up with your expenses and debt payments, you might speak to a credit counselling service. A credit counselor will look at the various debt repayment options, such as a debt consolidation loan or debt repayment arrangement. Under a debt repayment arrangement, the counselor will negotiate with your creditors to try to lower your interest rate. The only downside to this is that it will show on your credit bureau, which may hurt your chances of obtaining credit in the future.
You’ll want to speak to a counselor and consider all your debt relief options and choose the one that makes the most sense for you.
3 Mistakes to Avoid When Trying to Reach Debt Freedom
I enjoy being in debt, said no one. Almost everyone wants to understand how to reach debt freedom sooner. Nobody wants to feel stressed out about their finances. But even if we think we’re doing the right things to get out of debt, there are some easy mistakes we can make that can set us back and cost us dearly financially.
Here are three mistakes to avoid when trying to reach debt freedom.
1. Not putting it in writing
You may want to want to get out of debt long term, but have you put it in writing? If you want to make sure your pay your debt, it’s helpful to put pen to paper. Unless you write it down, your goal of being debt-free may never come true. By writing it down, it makes your goal seem more real, and it is a way to commit yourself to it.
While writing down your goal is an excellent first step, it’s not the only step. Come up with a plan and work hard so that you pay your debts within the timeline you set for yourself. If you want to set yourself a stretch goal, pay off your debt before the deadlines given to you by creditors. By doing this, you’ll save on interest and maintain your good credit score.
2. Not changing your spending habits
Unfortunately, money doesn’t grow on trees. You can’t expect to come up with extra money unless you’re willing to make sacrifices. That usually involves changing your spending habits. Unless you’re ready to cut your expenses, you’re not likely to make any progress in your goal of being debt-free.
It helps to treat getting out of debt like any other task you need to attend so, such as going to work or taking out the trash. It’s important to remain objective until you pay off your debts. For example, if you subscribe to cable TV and you’re struggling with debt, could you do without it for a while?
Although you may love your car, if it costs you a lot, are you willing to sell it or use it less often? Getting rid of car loans that are a drag on your monthly budget can go a long way. Those are the tough decisions you’ll have to be willing to make if you want to have your debts paid off sooner.
Here are 5 quick tips to help change your spending habits:
- Create a budget to properly track your spending
- Cut back in areas that you are currently overspending
- Start putting away 10-20% of your monthly income towards an emergency fund
- When making a purchase, be honest with yourself about whether it is a want or a need
- Save up for big ticket items rather than putting them on credit
3. Spending more than you make
It may seem obvious that you shouldn’t spend more than you make, but we’ll mention it anyway because some of us don’t seem to be getting the message. A famous quote says, “You will be in debt forever if you keep spending more than you earn.” I hate to break it to you, but there’s no way you’re going to pay off your debts if you’re continually spending more than you make.
Spending more than you make means you’ll have to find extra cash to make up the shortfall. You may take money out of your emergency fund or take on personal loans from banks and credit unions to make up the difference. If you’re continually doing this, you’ll always find you’re short on money, and that’s when the debt spiral begins.
No one enjoys being in debt, yet it’s nearly impossible to avoid debt these days. Even successful people have dealt with debt at some point. Instead of being embarrassed, make a game plan, and avoid as many debt mistakes as possible.
Needs vs. Wants: Making the Tough Decisions to be out of Debt Sooner
Everyone has their own approach to paying off debt. Some of us don’t mind debt if we can make the minimum monthly payments. Others despise debt and make it their mission in life to pay it off as quickly as possible.
Don’t overthink your debts. It’s quite simple. The higher the priority that you make paying off your debts, the sooner you will have your debts paid off. This all starts with coming up with a list of needs and wants.
Let’s look at how you can come up with a list of needs and wants and make some tough decisions along the way.
What’s a Need?
Something that is “necessary” is a need. Although everyone’s definition of a need is different, generally speaking, it’s essential to our wellbeing. The primary things in life we simply couldn’t do without. Examples of essentials include shelter, food and water, health, clothes, and transportation. Sometimes a need is a want. You need transportation to get to and from work but, does it have to be a brand new top of the line sports car or can you ride your bike? (Bonus: cut your gym membership cost because you bike to work every day!)
Once you’ve come up with a list of needs, it’s time to come up with a list of wants.
What’s a Want?
Something that would be “nice” is a want. Examples of wants include travel, entertainment, services, and luxury products. Some wants can be fulfilled by multiple “things”. So you may have redundancies, for instance, a phone, TV, and computer can serve many of the same functions, do they all need to be top of the line?
How to Get Out of Debt – Making Difficult Decisions
Every household is different. You’ve probably found at least one thing on the list of wants that you see as a need. For example, you may believe that you need a cell phone. However, if you’re dealing with a lot of debt, an important question to ask yourself is, how much do I really need to spend on a phone? Will simple call and text capabilities be good enough or do you need a high-end camera or email for work?
There can be a thin line between a need and want. If something brings you true joy and adds to your general wellbeing it may be a temporary need. An occasional “splurge” will not break the bank just don’t make too many excuses to break a good spending habit. While some of us can manage a balanced approach of getting out of debt, I find it’s most useful when you focus all of your energy on paying off our debts. When we do that, we can reach our goal of debt freedom even sooner. It all comes down to making tough decisions.
Every want that you move to a need is a step backward in your goal of paying off your debts. Every need that you move to want is a step forward. Keep that in mind in your journey to debt freedom. When you do this, you’ll gain better control over your finances, and you’ll be more likely to see real progress in your journey towards debt freedom.