How to Get out of Debt – Don’t Panic
Nobody goes into the working world and says to themselves “Getting into debt was/is a good idea”.
They go into debt with the bet they’ll leverage their money for a better life.
Anyone who tells you otherwise has it easy, is foolish, or both. According to this article , the average American will carry debt. Unsurprisingly, our generation will have the most student debt with 39% of them believing they will carry that debt for a lifetime.
Student loan debt hopes to get a better-paying job. Mortgages give a chance for a home.
But you have to be careful before you commit.
The sad statistic is that some job markets do not compensate enough to repay higher education. Some people get into a loan without anything to show for it at the end of the tunnel.
That’s terrifying.
Each type of debt is not the same.
Life is hard enough, but having someone you owe money to is additional stress no one wants. You’re borrowing from your future money while getting further away from your financial goals. The very nature of debt itself means that you will always pay that premium through interest for that debt.
No one wants that.
Happily, it’s not the end. It will end. And you don’t have to keep paying off debt forever or have this be the norm.
With a little planning and a bit of elbow grease, paying down debt is simple. They can achieved by one of these two popular methods that are tried and true.
1. Admitting there is a problem is halfway solved
While 39% of us have resigned to live a life of entrapment, you and I are not one of them. It is sad that some have decided not to deal with the problem – or chose to believe it’s not a problem at all!
Avoiding the problem only feeds it. Admitting there is a problem is already halfway out of the dark.
We don’t want to stay in the paycheck cycle. We know if we do, it is even harder to get out of it. But you’re part of the demographic who does not accept this to be your fate.
Now it’s time to start climbing up.
2. Math it up!
First – organize and list down all of your payments and debts.
Note the amounts due and when. Remember to record the minimum payments.
This will give you your target goal.
Now you know what you’re working with, we can pick two of the following methods to tackle your debt.
DOWNLOAD YOUR DEBT SUMMARY WORKSHEET HERE
3. Pick one of Two popular methods to tackle
Method 1: The Debt Snowball
Here you’re going to take a bottom-up approach to your debt.
After you’ve made a list of your debt you’ll arrange them from smallest amount to largest amount.
You’re going to target your smaller debts first and foremost now.
Whether it’s a couple of hundred dollars on a credit card or an outstanding cell phone bill, these are the “small” bills to pay off immediately.
Don’t give them a chance to grow any bigger. You’ll realise quickly that when the next month comes, you’ll have fewer minimum payments that need to be made.
Pros of the Debt Snowball
You end up with several smaller quick wins, and that will help empower you bit by bit.
You’ll build the confidence to start tackling the looming debt sizes.
You’ll also end up freeing a lot of cash flow that can be repurposed towards your more significant debts.
Cons of the Debt Snowball
Not really much cons here.
While you’re focused on the smaller balances, the larger debt will still be there.
So even with additional funds you run into, it’ll be paramount to stay the course and avoid incurring any smaller debt during this period to focus on paying off that final debt.
Is the debt snowball strategy good for me?
Let’s say you have the following three outstanding debts:
- A credit card debt of 5k with a 12% interest rate
- A student loan debt of $25k with 3% interest rate
- A car loan of $7k with a 3% interest rate.
According to the snowball method, the interest rate does not factor in. Instead, you would focus on the smallest debt amount which is the credit card debt. For this example, it also is the one with the highest rate – making it even better to pay off.
This method is commonly referenced by Dave Ramsey who swears by this method and consistently uses it in his programs.
DOWNLOAD THE DEBT SNOWBALL TRACKER HERE
Method 2: The Debt Avalanche
From Step 2, you’re going to arrange your debts from the highest to lowest interest rates owing.
This method is about how much the debt costs you based on interest rates.
Regardless of the amount, you want to pay off those first because the interest payments will tend to grow to make them the most expensive debts.
Pros of the debt avalanche
Doing this method will mean you’ll be able to save a lot on the cost of the debt itself.
In the long run, you’ll save a lot more with the overall cost of your outstanding debt. This strategy works well when you already have a healthy cash flow from income.
Which path to take for the debt avalanche strategy?
We will use the same three examples as before.
- A credit card debt of 5k with a 12% interest rate
- A student loan debt of $25k with 3% interest rate
- A car loan of $7k with a 3% interest rate.
According to the debt avalanche method you would tackle the credit card debt first because of the higher interest rate. But, again, this works out well in this case because you’re also tackling the smaller debt to free up cash flow first.
Which one is better for you?
Ultimately it all depends on your current financial situation and cash flow.
If you are confident with your discipline, then you can select the debt avalanche. This will save you money, due to the cost of your money being less.
On the other hand, if you can afford to make larger payments, you can also save yourself time.
With that said, the debt snowball method is simpler, with simple steps that help to train you to get credit savvy and grow your discipline. That means you can start immediately and see those results sooner, without having to overthink the entire situation.
Just target those small debts first!
4. Make the Road Easier
Shift your mindset from resignation to “Bring it on!”.
It’s only difficult in hindsight – we both know you can do it.
Even still, there are ways to make your journey easier and enjoyable.
Negotiate your expenses and cut the fat
Did you know you can actually negotiate your bill with service providers? In their eyes, some money is better than no money.
But if you don’t know how to do that – try TRIM! Trim is a part personal finance assistant and part robot that trims your unnecessary expenses. He saved his customers over $ 1 million last month alone.
Don’t Deprive yourself – Enjoy the journey
You need hope and nourishment in equal measure, too.
However, just because you can increase your income, don’t be tempted by lifestyle inflation.
Here are several ways you can enjoy the process without feeling like it has to hurt.
5. In the end, just start
It doesn’t have to be perfect on day one but do start with some debt recovery strategy as soon as possible.
It will take time, and you can continuously refine the process as you see fit. With every debt milestone paid off, you can reassess the situation, and pay out other debts even faster.
And don’t forget that emergency fund!
Make sure that your discipline holds strong. Don’t break the debt recovery process by getting into more debt. And don’t get dissuaded by just how long it may take.
There’s light at the end of the tunnel and you’ll be out of it in no time.
