How to get out of debt and stay away for good
Debt can make life a lot harder, but there might be a way out.
Being stuck in debt can rob you of your ability to meet your financial goals. When you owe a lot of money, hard-earned funds should going to save for retirement, financial emergencies and big purchases will instead go to your creditors.
Unfortunately, many people find themselves in debt – and if you are one of them, it could be very difficult to get out of the hole you find yourself in.
The good news is that there are solutions to help you get rid of your debt and hopefully stay that way. In fact, if you follow a few simple steps, you may be able to say goodbye to interest charges for good and keep more money in your pocket.
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1. make a debt repayment plan
Tackling your current debt is the first step to getting out of it for good. To do this, create a debt repayment plan to help you get organized and stay on track. If that sounds difficult, try a debt repayment app. These apps can create step-by-step plans and automate your payments for you.
When creating your debt repayment plan, decide which debts to include in your repayment plan. Then, make a list and determine which ones you will focus on first.
For most people, it doesn’t make sense to pay off your mortgage early because the interest rate on home loans is so low and the amount of money needed to pay off a mortgage before maturity is so high. .
While you probably don’t want to include your mortgage in your repayment plan, high interest debt like credit cards and payday loans should definitely be on your list. And if you don’t like paying interest at all, personal loans and car loans should be a part of your plan as well, especially if they have a high enough rate.
Once you know what debts you are paying off, you’ll want to find a budgeting method that works best for you. This method will help you decide on your debt repayment order. You still need to make minimum payments for everything, but you usually need to send your additional payments to one particular loan at a time. This can be the one with the highest rate if you want to maximize interest savings, or the one with the lowest balance if you need the psychological boost that comes with a quick win once paid.
Whichever method of budgeting you choose, commit to paying more than the minimum owed each month – and ideally a lot more. If you can make extra money to pay off debt, or sell unwanted items to pay it off faster, consider doing so.
2. Live on a budget
Living on a budget is essential for getting off debt, both during the debt repayment process and after.
When you budget, you can prioritize additional payments on your debt by reducing unnecessary spending. And once your debt is paid off, you can set a budget that ensures you can live within your means and start building your financial security.
There are different types of budgets to choose from, but for those who are paying down debt, it is often better to use a more detailed budget approach, such as a 50/30/20 budget. This means that you allocate 50% of your income to necessities, 30% to discretionary spending, and 20% to savings.
When making a budget, start by looking at your current spending to see where you can make realistic and lasting cuts. You can allocate every dollar to a job, including savings, expenses, and debt repayment, so your budget represents all of your income.
3. Save an emergency fund
Budgets can’t always take emergencies into account. Unfortunately, unforeseen expenses when things go wrong are a major reason many people end up in debt.
You can avoid this fate by saving an emergency fund, which can help cover surprise bills. Emergency funds should ideally contain enough money in an accessible savings account to cover at least three months of living expenses and possibly more.
If you’re still working on paying off your debt, it’s best to start small. Build up your emergency fund as much as you can while spending most of your extra money on debt. Then work on making it bigger later.
4. Track your spending
Your emergency fund can keep you from borrowing when something goes wrong, and your budget can help you avoid taking on debt to cover everyday expenses. But that only works if you make sure you stick to it.
The best way to do this is to track spending. You should keep an eye on where your money is going as you pay off your debt and after you are debt free. By monitoring your spending, you can make sure you’re living within your means. And if you need help, try a budgeting app. The best budgeting apps can track your spending for you and help you stay on budget.
While it may seem like a lot of effort to budget and keep track of every dollar, it will be worth taking these steps once you make some serious headway on paying down debt, building a fund for debt. emergency and hopefully the rest of your life without wasting money paying interest on expensive debt.
For more help getting out of debt, check out our guide on how to pay off your debt.