Working your way out of debt can be a long and tiring process. It requires a lot of hard work, drive, and focus, to change your mindset and teach yourself completely new spending habits. It is not an easy task to adopt new practices and reinforce them, but if you want to become debt free, you will find it essential to create and follow a set plan.
These days, debt is almost a normal part of life. When used well, a debt can be made as part of a strategic financial move. Such are student loans, car loans, business loans, and housing loans. There are also debts that can hardly be avoided because of necessity, such as calamity and medical loans.
Then, there are those debts that are simply detrimental to one’s finances. Borrowing money to finance one’s leisurely or non-immediate goals, for example, is considered a “bad debt” and is to be avoided at all costs. Credit card debt is a very common form of this. Though interest rates appear light at first, over time this can snowball to considerable amounts.
And once you’re into debt, getting out can be very hard. It’s often a slippery slope, and it’s hard to break the habit of taking on more debt to pay past dues. It’s even harder to gain the financial leeway needed to pay off one’s debts.
Here are 14 essential tips to help you to formulate a plan and stick to it.
1. Work out your current debt
It may seem obvious, but the first thing you should do is to sit down and calculate your current debt. A surprising number of people living with debt do not do this, but it is vital to understand how much debt you have. Work out how much interest your debt is incurring as well as the full amount you owe and your monthly repayments. You have to work out these numbers in order to set your financial goals. To become free of all debt, you first have to fully understand that debt.
2. Pay more than your monthly payment amount
You will not shift your debt by paying just the minimum monthly payment on your credit card. In some circumstances, your debt can even go up. Therefore you have to make an extra effort with your repayments, and pay more each month than the minimum amount. The more you can pay off each month, the better your finances will look in the long term.
What exactly I was doing with my debt was paying from 25 to 30 percent of the total loaned amount, so that I could be debt free in just a few months. I advise that you follow what I do in tackling any debt you have.
You can calculate from this credit card calculator how much the total interest to be paid is, by the time you’ve eventually paid off the debt.
3. Set a monthly budget
Setting a monthly budget is vital. To stay on top of your debt, you have to budget for all expenses, including rent, car payments, insurance, utility bills, and other regular bills. You should also budget for gas and groceries. After working out your budget for all these essentials, you can then set a budget for how much you want to pay towards your debt. This level of planning will help you keep your finances under control.
4. Start a savings account
To become debt-free and ensure you stay that way, you have to start saving money. Setting up a solid savings account for emergencies can help to prevent you slipping into unmanageable debt in the first place. You might not find it easy to pay in much to your savings account, but over time, it will grow into a stable, reliable source of security.
Always think of money saving tips. This way you are forcing yourself to save more money.
5. Cut a luxury out of your routine
Most people have a luxury or a spending habit that drains them of a substantial amount of money per month. Look at your own spending and think about something you habitually splash out on. It might be a restaurant treat on specific days, or a morning cup of coffee from a favorite cafe every day on the way to work, or an impulsive buying of branded items. These are the reasons why expats can’t save money, so I suggest avoid those luxurious habits to save you from the trap of debt.
Cutting such extra expenses out is a good way to reallocate that money into either a debt payment or your savings account and investments account.
6. Upgrade your livelihood
Whether you happen to have a job at that moment, or you do not have any means of employment at this point, the first thing you should be looking to upgrade is your livelihood. Maybe you have a skill that is being under-utilized, or maybe you are not being paid enough. Either way, you may want to either shop around different employers to compare their salary packages, or position yourself for a promotion.
7. Create a side job
There are many means to earn a living on the side, during your off hours. One is through blogging, earning money through advertisements and affiliations. You can also set up a small business either online or at home. For those whose free time isn’t fixed, you can also try freelancing. Many online platforms can help you score clients if you decide to go this route.
Blogging is more convenient for an expat like me to start a side job because I can simply sit at a table in my home after office hours and I have fun doing it.
8. Be frugal
Understand your cash flow, and determine where each cent is going. This starts with creating a monthly budget, but it should end with you determining unnecessary expenses and cutting them out. You can also find ways to reduce existing expenses. Some of them may require some extra legwork or manual labor, but that’s a small price to pay to get out of debt.
9. Start investing
Many people are afraid of investing because they think they might lose all their money. But armed with the right knowledge and a temperate mindset, investing is a controlled risk where the chance of earning is always more than the chance of losing. Learn when the most opportune time to invest is, and put your extra money to the investment fund of your choice. You can join online classes and communities to learn more about how to invest.
According to Warren Buffet, “Don’t lose money. Invest in what you know.” These are the words that I always remember to avoid excessive money losses.
10. Limit your vacations
Burnout is a real problem, and nothing fixes it like a vacation. But when you’re burdened with debt, some leisure has to be sacrificed. Instead of travelling to places or splurging on trips, replace some of your vacations in the year with less expensive but equally fulfilling activities. This will largely depend on your personal preferences, but the Internet should be brimming with alternative ideas.
If you’re not able to nail down your monthly budget, the 10-20-70 rule could help a lot. This rule states that you should spend 70% of all your earnings on monthly expenses such as rent, water, electricity, food, etc. The 20% goes to paying your debt (once you’re debt-free, this goes to savings). The last 10% goes to tithing, and/or other similar offers. The fixed distribution of your budget doesn’t make this a very flexible solution, but it’s great for starters because it’s easy to remember and implement. Also, it adds a spiritual dimension to these otherwise worldly concerns.
12. Don’t take on other debts
The last thing you want to be in right now is more debt. There’s a very real temptation to borrow money just to pay a previous debt, but that only sends you in a downward spiral. Resist the temptation, stick to your gameplan, and weather it out — soon you’ll be thanking yourself. Instead of taking on more debt, try negotiating more amenable payment terms with your debtors. Most of them will be happy to arrange more flexible terms with you.
13. Distinguish between good debt and bad debt
We’ve already discussed this at the start of this guide. Good debt is anything that is used to further your life goals, such as important loans. Any debt that goes only towards your leisure, or anything that is ultimately unimportant, is considered bad debt. Understanding this can help you better control yourself when deciding whether or not to take on debts.
Now, it is important for you to know “How Debt Works” and how you can apply the idea of increasing your cash flow to become a debt free person.
14. Start saving for emergencies
An emergency fund is an important component of financial security, and there’s no better time to start building one than now. This is different from your investment and savings accounts. Ideally, your emergency fund should be equal to six times your monthly salary. Yes, it requires a lot of work to set up, but when the unexpected happens it’s the only thing standing between you and financial ruin.
Learning the best financial practices is never easy, since it always includes breaking down some misconceptions and correcting wrong habits. The important thing here is to keep searching for better ways to earn, save, and spend your money wisely. This is why it’s very important to understand your cashflow in order to understand what opportunities you have. If you keep at it, you’ll eventually realize that elusive dream of financial freedom.
As you can see, it is vital to assess your lifestyle and debt carefully before you create any kind of financial plan. Doing this will help you get to grips with your personal situation fully.
When you’ve done this, you can make a plan for your monthly payments. Having such a plan will also enable you to budget for the rest of your lifestyle, including putting savings aside for your emergency fund or a savings account. All of these components will add up, and together they will contribute to a healthy financial mindset, giving you the motivation and foresight to become debt free as soon as possible.
What methods do you apply in becoming debt free? Please share your thoughts below.