The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.
3 Steps to Being Debt-Free
Debt is undoubtedly one of the easiest things to accrue and one of the hardest to get rid of. In fact, the average household in the United States carries over $50,000 in student loan debt alone. From mortgages and auto loans to credit cards, sometimes it seems like an impossible task to reach your financial goal of living debt-free. However, armed with a plan, a budget and a few helpful tips, you may be able to reach that goal sooner than you think. Take a look at these steps to help you take control over what you owe!
1. Get an Accurate Financial Picture
Find your financial starting point by ordering a copy of your credit report and credit score. Your credit report will have your current debt obligations, interest rates, credit evaluations and any errors, which you can begin fixing. You can get your official credit report from the credit bureaus, (TransUnion, Experian and Equifax) once a year at no cost to you. If you’ve already obtained your free report from the bureaus earlier in the year, you can obtain additional free reports by visiting AnnualCreditReport.com or GoFreeCredit.com. Having your most up-to-date list of debts can make it easier to see exactly how much you owe and allow you to create a budget based on how quickly you want to pay it off.
2. Adopt Simpler Ways to Budget
Establishing a budget is one of the key factors in being able to pay down debt quicker. It is easier to figure out how much money you can use toward paying off debt once you determine the amount you have left over after bills and essentials. Not only that, but it allows you to see where you can eliminate some of those unneeded purchases from your spending.
- Build your emergency savings fund first: Putting extra money you’re making into an emergency savings account may seem counter intuitive when you’re trying to pay off debt fast, but it’s a necessity. If you are planning on having a smaller monthly budget and will be putting more toward your minimum payments, having an emergency fund is extremely important. This will ensure that if something unexpected pops up, you have the money readily available instead of having to use credit cards to pay for it. Plan on having at least $1,000 in this account before starting to use your extra money toward debt payments.
The 50/20/30 guideline: This method breaks down your spending into three sections – 50 percent of your monthly income allocated for fixed costs, 20 percent for financial goals and 30 percent for flexible spending.
- 50 percent: Fixed costs are bills and expenses that don’t vary much, such as rent, utilities or car payments. Gym memberships and Netflix subscriptions fall into this category because they are set monthly obligations; however, those are also easy places to cut.
- 20 percent: Financial goals are investments for your future. Paying down credit card debt, saving for a home or increasing retirement savings goes here. This section of your budget is where you will determine how much money you will have to pay down your debt from each paycheck.
- 30 percent: Flexible spending covers food, entertainment, shopping, hobbies and gas. Financial planners highly recommend building some degree of flexibility into a budget, so that you can stick with it.
- Download a budgeting app: One of the easiest ways to keep track of your finances, if you’re not interested in manually writing down every moment you spend money, is a financial app. By using apps such as Mint®, you can connect your debt accounts and compare them to your income. The app will then automatically build a budget based on your spending habits. You can manually adjust this budget if you want to cut even more corners. Remember, if you don’t purchase that $2 coffee for 30 days, that’s an extra $60 you can add toward your debt budget! Cutting out unnecessary spending, such as eating out when you have food at home, can help accumulate additional funds over time, and you can use those extra funds elsewhere.
- Debt Consolidation: While this option may not be suitable for everyone due to the potential of having a hard pull on your credit report, meaning it can slightly lower your credit score and will stay on your report for two years, debt consolidation can be a big tool for not only your budget and debt relief, but also for saving money on interest. This route can help get rid of your debts with the highest interest and move all of those separate monthly payments into one place. You may also already have debt consolidation options in your midst without having to open an additional credit line! Balance transfers are an efficient way to consolidate debt, and some credit card companies offer balance transfer promotions throughout the year for as little as zero percent interest. Check with your current credit card companies to see if they have any of these options!
3. Make More, Save More and Spend Less
At this point, you’ve established your budget and you know how much extra money you have to help pay down debt. But what if you want more? Try some of these strategies to get an extra buck to apply toward debt.
- Sell stuff you don’t need: Let’s be honest, you may have an emotional attachment to that designer bag or baseball card collection, but you haven’t touched it in years. These items could potentially make you a good-sized chunk of change. Selling items you no longer use can bring in some extra cash to help pay down your debt and resale apps like Poshmark and Ebay make it easier than ever to get rid old items. You can even bring unwanted clothes to local consignment shops and make a quick dollar.
- Negotiate your interest rate: Sometimes a credit card company is willing to hear out their card holders to negotiate a lower interest rate. Start with your oldest credit card first, as companies are more willing to accommodate a long-standing customer. Now, this doesn’t always mean you’ll get a resounding “Yes!” from a company, but inquiring about lowering your interest rate can also open up conversations about other options they may have for you, which you can take into consideration. If they do happen to say yes, this will be extra money you won’t have to spend toward paying interest.
- Deposit a fixed amount in your checking: Something most people do when they get a direct deposit into their account is deposit a fixed amount into their savings and the rest into their checking. However, you should actually adopt the opposite method. Once you’ve established your budget, deposit only what you need into your checking account. This way, you have a firm amount you can spend until your next paycheck. If you don’t have anything above that fixed amount in your account, you’re less likely to spend it. This will make it easier to take the extra funds and either apply it directly to your emergency fund or your debt accounts.
- Limit your time on social media: You may be thinking, “What does social media have to do with my debt?” Well, think about it. How many ads do you see a day on platforms like Facebook and Instagram? Recent studies show that social media can actually influence how we spend our money, not only by the ads persuading us to buy certain products but also by seeing the experiences our friends are having. If you see some of your friends posting about something as simple as the new unicorn latte at the coffee shop, you’re more likely to want to purchase it too. Decreasing your time online can have an impact on your spending habits and even help you save money!
We understand that debt can lead to a lot of stress and sometimes you may feel like you’ll never be debt-free. But remember, living a debt-free life is possible. It may require some lifestyle changes, but as long as you have a plan in place and stick to your budget, you’ll begin to see your debt dwindle in no time. Tackling your current debt will only help you get closer to reaching your long term financial goals!
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