Carrying debt around is a heavy burden. And for most, becoming debt free is a momentous achievement. No matter how large your debt may be, becoming free of your debt is possible. You don’t need to feel like you are just barely getting by anymore. With a goal in mind, a commitment to it, and getting into good habits, you could be debt free sooner than you ever thought possible.
1. Objectively Assess your Debt
Experts in the financial world might disagree on whether debt can be good or bad. Some believe that absolutely no debt is good, while others see the benefits of taking on a little debt. Obviously, the worst kind of debt is the kind with high interest rates, such as credit card debt. Credit cards typically finance the impulsive “wants” in our lives. But those “wants” could turn into pricy burdens when you swipe that card and pay more for them later.
Still, it is possible to take on some debt, and have it be beneficial to you. The more positive kind of debt to acquire will provide you with something important—such as a roof over your head or a car to take you to work. As long as the interest rates are reasonable, this kind of debt may be okay to hang on to as you simultaneously save for retirement or pay off other, more financially destructive debts.
For assessing your debt, you will need to organize all of your expenses, determine how much debt you have, and decide which ones need to be paid off more quickly than the others. The ones that should be paid off fastest are those with the highest interest rates. You are throwing money away by paying into high interest rates, and it’s time to prioritize those debts to the top of the list. This means that while you make payments on all of your other debts, you would put as much money as your budget allows into the high interest debts.
It helps to know your debt-to-income ratio, as you can get a visual of what your debts are, how much you make, and what you have left over. Typically, this calculation benefits lenders in that they can see if you can realistically fit another payment into your budget. But for you, it can help determine where you are at in terms of your debt, and where you would like to be. An online calculator can help you determine this figure.
2. Make a Plan for Repayment
If you feel that your debt is fairly manageable, and you can come up with a plan and stick to it, then make sure you calculate all of your debts together and determine how much you can pay each month. Decide which debt you should pay off the fastest (typically the one with the highest interest rate), and dedicate extra cash to that debt. Once that one is paid off, move to the next one.
3. Dedication and Organization
Once you have a plan in place, you’ll want to be able to stick to it easily. Create a small space in your home dedicated to your mail, a filing system, and a calculator. The more organized you are, the less likely you are to forget to pay a bill on time. Keep your bills in a filing system that works for you, and separate them into auto insurance, credit card bills, utilities, etc. You could even set up automatic payments on some (or all) of your debts through your Rocky Mountain Bank & Trust bill payment system.
An Excel spreadsheet may help you keep up on your payments, and to track your payoff progress, as you can easily edit it monthly. You can separate your interest rates, the minimum payments, and how much you will pay in total each month. Also, this visual tool can keep you motivated, as you can monitor your payments and see your progress.
If you have a spouse or partner whom your debt-free goals will affect, he or she will need to get on board with you. A supportive partner can be all the difference in sticking to your goals (or, a negative influence could pull you into the same, bad habits). Just be sure you communicate and agree on a clear strategy. If your and your partner’s lifestyle will need to change—perhaps you don’t go out to eat as often or buy your morning coffee from a pricy shop—make sure your partner will be an ally in these changes. The more open your communication, the fewer disagreements you may have.
A major life event could affect your financial situation drastically. If you experience a job loss, a medical issue, or another problem that will affect your finances, make sure you let your creditors know. They may be more lenient with your payments and avoid reporting you to the credit bureaus if you quickly communicate your struggles.
5. Just Say No
One of the reasons many people end up in debt is the convenience of purchasing the things they want immediately, and having the opportunity to pay them off later. Without serious self-control, credit cards can be financially devastating. The problem is, there are always new “wants” available, and with past items still being paid off, new items are tacked on to old debt. And the debt can quickly snowball.
If possible, for a while, avoid the places that you know tempt you to buy unnecessarily (online shopping, malls, car lots, etc.). If the temptation isn’t there, you can’t spend the money. Then, when you do end up in places that you are prone to spend money, avoid buying anything you don’t need that day—you could even tell yourself that you’ll come back for it in a week. Sometimes, the novelty of the item will wear off, or you may forget about it completely.
6. Adopt New Habits
This step is vital for retaining your newfound debt freedom. Using the same tools you used in paying off your debt will help to turn these new habits into a lifestyle. Once you are debt free, continue to exercise the same self-control that you had to use while you were paying off your debt. Just like changing your eating habits, for example, you should expect to take a little time to get used to the new ways you view and spend money. It will take commitment on your part, but the longer you stick with it, the easier it will be to view these changes as aids in securing your future.
Freedom is a Beautiful Thing
It takes time, patience, and commitment to get out of debt, but hopefully these steps can help you towards your goal of debt freedom.