Debt is a serious problem. According to a recent Gallup survey (source: Gallup http://www.gallup.com/poll/168668/americans-rely-less-credit-cards-previous-years.aspx) the average American has 3.7 credit cards with a whopping 71% of us having at least one card.
Furthermore, according to a survey by Bankrate.com (Source: Bankrate http://www.bankrate.com/finance/consumer-index/many-americans-living-paycheck-to-paycheck.aspx) a shocking 32% of us say we live paycheck to paycheck, and that staying current or getting caught up on bills is our main financial concern. In uncertain economic times like these, we need a plan and we need it fast.
Here are a couple quick reasons why you pay your debt off as quickly as possible. Donâ€™t like mine? Get a paper out right now and make your own. Write out your personal why.
Increase Your Credit Score
Reducing your balance-to-limit ratio on your credit cards can increase your credit score. Your credit utilization should be no more than 30% but the lower the better! Paying off your cards each month is ideal.
More Financial Security
Having no debt leads to greater financial security. Although you can get apps that loan you money, financial security comes from paying these off and not owing money to debt collectors. Monthly payments tie up a good portion of your expendable income. You could be spending the extra money on things you want instead of just things you need.
You could be saving for college, retirement, or a down payment for a house or car. You could begin building wealth by making smart investments. No amount is too small.
Now that youâ€™ve got ample motivation to get started eliminating your debt how are you going to do it? Get out the paper you wrote youâ€™re the reasons you want to get out of debt and now add the part about how youâ€™re going to get that accomplished. Of course, certain types of debt are much worse than others. By having a look at a site like https://www.loanry.com/blog/types-of-bad-debt/, you can find out which types of debt are the worst to have.
Itâ€™s been proven that if you write down your financial plans and goals you are more likely to reach them. Letâ€™s get started!
Review Your Budget
Find ANY area you can cut back. I would strip back that budget to what Finance Guru, Dave Ramsey, calls â€œbeans and riceâ€. You get the idea?
Strip back your budget to the items you have to pay, and get the expendables to as little as you can. Cut out and turn off ALL non-essential-to-life items. These would be the â€œwantsâ€ like cable, manicures, dinners out, vacations, etc.
List Your Debts
All of them! It doesnâ€™t matter if itâ€™s a $3 library fee, or a $10 loan from Mom or even a $20,000 car loan write them down from lowest to highest.
Note: for the purpose of this exercise we are only dealing with consumer debt in this article- do not include your mortgage at this point.
Take all of the money that you have from stripping back your budget to essentials and start putting it towards your lowest (dollar amount) debt paying the minimum only on the rest.
Paying off your littlest debt first will give you a sense of immediate freedom. Once that debt is paid off take the increased money you now have and apply to your next biggest debt.
Itâ€™s called â€œSnowballingâ€ and it works well. The snowball gets bigger as it rolls. In the same way, the more funds that become freed up, the more you will be able to add to the next debt and so on.
Make a Plan
Plan out (on a calendar) how long it will take you to pay off each debt. Build in little incentives in your budget for each debt paid off, (or if you have a lot of debt, or will take a long time, celebrate Â¼ milestones, or Â½ milestones on debts).
It will help you to see progress. Donâ€™t go crazy though. Only use $10, or $50 (whatever is reasonable) of your snowball debt money to treat your family (maybe dinner, maybe more grocery money, a movie, etc.) when you have hit a goal. Your family will be sacrificing for a period of time so itâ€™s good to reward them for short-term goals to keep the long goal in view.
Look for Extra Money
Find ways to add more money to help your snowball grow so you can pay off your debt sooner. Have a yard sale, get a paper route, or deliver pizza, or start an Etsy shop (donâ€™t spend a lot of money on supplies, etc.) to sell your hobby, or start with a direct sales business for a season (one that doesnâ€™t require a huge investment- do your homework!) or _________. Figure it out! You can do this!
With dedication, hard work, and sacrifice, you can get out of debt- quick! And then work a plan to stay that way.