If you want to get out of debt, you need to create a plan to help you reach your goal. But don’t let creating a plan get in the way of paying off your debts.
Practical Steps to Create a Plan for Getting Out of Debt
Here are some practical ways you can quickly tackle your credit card debt, as well as loans, lines of credit and other money you owe, to reach your goal of getting out of debt:
Use Cash to Separate Needs from Wants
Put your credit cards away until you have completely paid off the outstanding balances. Paying for your purchases with cash instead of credit will help you separate needs from wants.
Prioritize Debt Payments
Make a complete list of all of your debts (outstanding balances, interest rates and charges) and prioritize them in order of importance. Mortgage payments and vehicle payments are typically at the top of most lists.
Review Monthly Expenses and Find Ways to Save
Review your monthly expenses and look for opportunities to cut your costs. Making your cup of coffee in the morning instead of buying a $3 specialty coffee will save you over $1,000 a year! Check your spending for more ways to save.
Create a Realistic Personal Budget
Creating a realistic monthly household budget is easier with our monthly expense tracker and budget calculator. And it’s not all about spending as little as you can. The key word here is realistic, so our calculator will give you suggestions about how much you should consider spending.
Taking the time to create a monthly spending plan and to track your purchases will allow you to stay within your budget and maximize your ability to pay down your debts.
Establish Realistic Goals to Pay Off Debt
Establish realistic goals for paying off your credit card debt as well as other consumer debt (lines of credit, vehicle loans). While it is easy to run up credit card balances in a short period of time, it will take time and self discipline to pay them off. Monitor your progress regularly to help you stay on track and motivated to reach your goals.
Snowball Your Payments to Pay Debt Off Faster
After paying debts that are on fixed monthly payments (mortgages, vehicle and term loans), make the minimum payments required on your credit cards with the lowest interest rates and maximize your payments on the credit cards with the highest interest rates.
Once a debt is paid use this extra money to pay down the credit card with next highest interest rate. This is sometimes called the snowball method to pay debt off, and it will save you money and help you pay down your debt faster.
Pay Off Credit Cards or Debts With Very Small Balances Owing First
Consider paying off credit cards with small balances first. Psychologically it shows that you are making progress. Once paid, cut up and cancel the credit cards. Most people only require one major credit card and perhaps one retail credit card with savings incentives during special sales events.
Use All Available Extra Money to Pay Debt Off Faster
If you regularly contribute to a savings plan consider suspending the payments until you have paid off your debt. The money you save by paying down your debt faster will be substantially higher than the interest you will earn in a savings plan. Also consider using income tax refunds, pay increases or other unexpected funds to pay down your debts.
Consider Your Debt Consolidation Options and Solutions
Consider consolidating your debts with a consolidation loan or transferring your credit card balances to a low rate credit card. Carefully investigate the terms, conditions and any hidden fees as well as evaluating the overall interest savings you may realize.
Cut up and cancel your credit cards if you choose this option, otherwise you may be tempted to continue using your credit cards and further increase your debt load.
There are many options to consolidate debt, so don’t be afraid to ask for help if you need it.