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Getting out of debt for some can be easy or it can be difficult. Regardless of your situation, you’re going to need some kind of plan and the ability to execute that plan. It’s for this particular reason why we’ve put together a simple six-step process for you get out of debt completely. Of course, as you are making your plan, you’ll need to make adjustments to your budget so you don’t overspend, but with this step by step process, we’ve got you covered.
The first step you want to do is to first make a list. This list should have everything written out. This means your debts should have creditor info, interest rate, balance, and the minimum monthly payments. This also means listing out how much you’ll have to pay in order to zero-out your credit card debt within three years (located on credit card statements). You also want to include loans that aren’t even listed on your credit reports like family loans and medical bills.
Once that’s all done, your second step is to work on lowering your rates. The last thing you want to do is pay on a higher interest rate when you could actually make it lower. For this reason, ask your card issuer if there are any lower interest rates on credit card balances. You can also look into refinancing loans or finding credit cards that you can transfer the debt to that’ll charge you less interest as well. Anything that can tip the scales in your favor is always better.
The third step is getting your number. This number is the total payoff of all of your debts. This helps immensely because you now have a figure for what you need to work towards in order to pay off everything. Your payoff number should consist of your total debt owed but also how much per month you’ll need to pay.
From there, your fourth step is to plan your strategy. Match the debt up with your budget and see if you can afford to make the total monthly payments. If you can’t, get some credit counseling or even a bankruptcy attorney for advice. Though keep in mind claiming bankruptcy hurts your credit score significantly, so work out a payment plan with creditors first. If you can afford the total monthly payment then pick a debt you want to pay off first. You can go two ways: highest interest rate, or lowest balance. From there you can set up auto payments.
The fifth step is to monitor and adjust, after all, while a plan is set and good, you can’t just sit back and relax. You want to make sure you track your own behavior to ensure you can still make those payments from month to month. If you can’t, you’ll need to make adjustments. Furthermore, you want to be checking your credit score as well which should change as you are paying off debt. This can entitle you to lower interest rates as well which change how you pay.
The final step is during all of this create an emergency fund. This fund can be like a savings account. It’s something that you shouldn’t pull from unless you are in a life or death situation. It’s an emergency fund and should be used in situations like “my lights are going to be shut down” or “I’ll be homeless if I don’t make this payment”. The reason being is that life happens and some unexpected expenses emerge. From a medical bill, car repair or even losing a job. Ideally, you want to be saving up enough to live for six months with no income source. If that’s not possible, aim for at least one month. How you can do this is pretty simple thanks to the help of automation. Ask your employer to allow you to contribute a portion of your pay to your savings account, or download some apps that’ll automatically transfer money from your checking account to your savings. If you want to get out of debt you want 10 to 20% of your earnings to be dumped into savings. If that’s too much try with 5% as a start.
We all can get out of debt when we put together a simple plan and keep an eye on it. These days with automation, it’s even easier for us to get out of debt!