- Too much debt makes it difficult to pay bills, including necessities like food, housing, and healthcare.
- Owing more than you can afford, can lead to missed payments, damaged credit, and the foreclosure or repossession of property.
- Paying off debt strengthens your finances.
Debt can be a double-edged sword. It allows you to purchase things you want and need but can ruin your finances if you borrow too much. It can also be tough to determine the amount of debt you can comfortably afford because circumstances can change unexpectedly.
Owing more than you can reasonably pay can quickly lead to late payments and higher borrowing costs. It can have the domino effect in many cases, quickly spiraling out of control.
If you are ready to dig yourself out of debt, here are five steps that can help.
Take Inventory of Your Finances
The first step is to understand the amount you receive each month in relation to what you owe. To do this,take inventory of your finances. Review income and expenses for 30 to 90 days to gauge earnings and spending habits. A 90-day review provides a more accurate assessment because not all months have the exact costs.
The assessment of debts should include the total amount owed, interest rate, and minimum monthly payment. As you create your financial balance sheet, you will understand what you owe, allowing you to create a realistic debt elimination strategy.
Run the Numbers
Using the balance sheet you created, look for ways to cut costs before calculating the amount you can realistically put toward debt elimination each month. Then calculate the amount of time it will take you to become debt-free.
Implement a Plan
Next, create a detailed plan, giving you a road map for success.
Debt elimination is as much about strategy as it is about income. You might start with the lowest balance or the highest interest rate. Roll the monthly payment into the next debt as you pay off accounts. There is no right or wrong way to pay off debt. The key is to pay down balances consistently without adding new charges.
Whatever plan you choose, establish an easy way to track your progress and prepare for roadblocks, like unexpected expenses, to happen along the way.
Include Savings as Part of the Plan
One of the biggest mistakes in paying off debt is to be so aggressive on the monthly payments that you run short in other areas. To address this issue, put something in a savings account each month to manage unexpected expenses. It may seem like this strategy will slow down your progress, but in truth, it provides a cushion that can help you avoid new debt when the unexpected happens.
Don’t Underestimate the Power of a Budget
When used correctly, a budget can be powerful because it guides spending. A budget will help you see where your money goes and uncover wasteful spending, providing more money for debt elimination.
Your budget must represent actual spending and be fluid enough to change as costs rise and fall, to be effective.
Final Thoughts
In some cases, you cannot cut spending or earn more to bridge the gap between what you owe and what you earn. If you cannot create a sustainable plan to get out of debt, there is help. Debt relief agencies can help you renegotiate the terms of some debt contracts allowing you to pay off the debt for less than the total amount you owe.
