Being in debt feels terrible. It will keep you from reaching your financial goals, and it can be a source of stress and grief.
I’ve been there… always worrying about my finances and swimming in debt.
Here’s what you should know… debt isn’t a life-long sentence.
Many people across the nation struggle with getting out of debt because they’re not sure where they should start.
I get dozens of questions about paying off debt. They sound something like:
“Which debts should be paid off first?”
“How much should you pay each month?”
“How long will it take?”
“Will it be hard?”
Well, here are eight steps that will give you the direction you need to become 100% debt-free.
1. Have a “Come to Jesus” talk
It’s true. It’s never a good idea to dwell on the past. But in this case, looking back can be very beneficial. Why?
Because getting out of debt — and staying out — requires that you change the habits or circumstances that led you to get into debt in the first place.
Think about it… How did you get into debt? Did you take out too many student loans without a plan? Did you rack up credit card debt in college without a job to pay it back?
Take some time to think about it and write it down. Start with jotting down three to five factors that contributed to your debt. What could have done and what will you do differently to avoid debt in the future.
Important Note: Your Debt May Not Be Your Fault.
Sure majority of people wind up in debt because they overborrowed. However, this can’t be said for everyone. Many people struggle with medical debt after sickness, or debt that incurs during divorce, and loss of a job.
I mean, it’s pretty easy to get into debt, wouldn’t you agree?
Taking the time to reflect on the things that led you into debt isn’t will help you recognize your mistakes so you can prevent the same thing from happening in the future.
And if you have children, or will have them someday, these are valuable lessons to pass along to their family too.
2. It’s not about how much you make, but how much you keep
One huge lesson I learned on my journey to become debt-free is the importance of managing my spending.
Although I was making more money every year, somehow I was also becoming broker. I was racking up credit card debt, unnecessary loans, and taking advantage of every sale known to man.
This was when I had to come to terms with my bad spending habits. Let me tell you, it was tough. I had to come to grips with the fact that my poor spending habits were ruining my financial future. I had to get rid of them.
The first step to start controlling my spending was to pull my bank statements. I then started categorizing each transaction with a handy dandy highligher and totaled up each category. This lets me know exactly where my money was going.
My spending categories were: housing expenses, transportation, food, entertainment, etc. And after adding them all up, if I noticed I was spending an abnormal amount of money in any category, I looked for ways to cut back on that particular expense. For example, if more than 25 percent of your income is going toward entertainment or food, you should figure out how you can reduce it to 20 or 15 percent.
3. Add it up
Up until now, you’ve probably remained oblivious to how much debt you have. But, now is the time to face reality head-on.
First, make a list of all your debts, the amount you owe, the interest rate, and the minimum payment on each account. Use recent billing statements, bank statements, and your credit report to get a complete list of everyone you owe and the total amount you owe.
4. Determine how much you can pay
If you’re currently paying the minimum payment every month on your accounts, it will take you several years to pay it off. It’s literally like throwing a teaspoon of water on a full blazing fire.
To get your debt paid off ten times faster, you’re going to have to send in more than the minimum payment each month.
I suggest using your monthly budget to help you determine out how much of your income you can designate towards paying off debt.
To do this, you will get a total opf all of your income. This includes all your wages, tips, alimony, bonuses, child support, dividends, ect. Then, subtract what you spend each month on al all your required expenses. This includes mortgage or rent, utilities, food, transportation, medical expenses, and your current debt (minimum) payments.
Pay Extra Whenever You Can. The more money you can put toward your debt, the faster you can pay it off. If you’re on a fixed income, look for ways to minimize your expenses or increase your income.
5. Craft a Plan
Crafting a plan doesn’t have to be complicated. All you need to do is prioritize your debts by the interest rate.
Which Debt Should You Pay Off First?
It depends on your goal. If you want to save more money on interest payments, start by paying off the debt with the highest interest rate. If you want to focus on paying off your creditors faster, start with the debt with the smallest balance.
How Much Should You Pay? Once you’ve prioritized your debts, decide how much you’re going to pay every month. It’s best to make a lump-sum payment one of your debts while paying the minimum on all the other accounts. Then, once you’ve paid off one debt, redirect your lump-sum payment to the next debt on your list. This is a great way to chomp away debt fast, without having to make any more money.
6. Make the Payments
With a plan and a monthly payment amount, what you have to do next is send your payments faithfully every month. This part of the plan will take the longest, several years, depending on the amount of debt you have and the payments you make. The key is consistency.
If you start this month and give up the next, you’ll be sure never to reach your goals of debt freedom. But, if you stick with it, month after month, you’ll inevitably reach your goal.
Track Your Progress and Reward Yourself. Becoming a master of your money doesn’t have to be boring. Encourage yourself on your journey with milestone rewards. Take a mini-trip (not on your credit card), take a visit to the spa, or buy yourself a gift. Whatever makes you happy. As long as it keeps you motivated to reach your goals and doesn’t help you create more debt.
7. Don’t Create More Debt
You can’t use your credit cards if you want to get out of debt. Creating debt while you’re trying to pay off debt will only hurt your progress. It’s like taking two steps forward and three steps backward.
It’s not necessary to close your credit card accounts unless you think you won’t be able to resist the temptation to use them. I’ve battled with myself time and time again about keeping them before I had the confidence to use my credit responsibly. So, instead of swearing them off completely, I chose to freeze my credit card accounts to prevent myself from using them.
Now that I have more confidence with my money management, I can use my credit responsibly without the worry of falling into an unimaginable amount of debt again.
8. Practice Makes Perfect
It may not be a complete smooth sailing on your road to debt-free. There may be setbacks and roadblocks you’ll encounter that you’ll have to overcome as you practice this new habit of money management.
My daughter reminded me about the power of practice the other day.
All summer, I had been fussing at her about her tumbling and flipping around on the couch. She was tearing the furniture apart!
Anyway… the other day she walked up to me and said, “Mom, LOOK!”
I looked over, and she was doing a backhanded flip like a pro! I was overjoyed for her because she did it! She reached her goal by practicing even though I fussed and nagged the entire time lol!
So no matter how many times you tell yourself it’s hard or that you’re never going to make it. I’m here to affirm that you can, AND you will.
I want to remind you that this is a journey. It will take time. But I can assure you, with a little consistent work and extreme focus, you will get there.
Bonus: Extra Support
If you ever need any help with growing your bank account, strategizing a proven debt payoff plan, and setting yourself financially free, we’ve got the resources to help you do it.
Our Money Mastery Class was designed to give you my exact blueprint to knocking out your debt and carving a path to financial freedom. This program will revolutionize the way you save and spend money and help you experience more fulfillment and fun than ever!