Let’s face it; many of us apply for a variety of loans throughout the year or take advantage of credit cards as needed to survive in a capitalist economy that fuels itself through revolving credit.
While it’s easy to get a loan, it can often prove disastrous if you don’t know how to manage it properly. If you don’t have any plans to pay off your debt, loans have a snowball effect where it continues to accumulate until you are stuck in the pileup.
On the other hand, experts also agree that there are practical steps that anyone can take to get out of the mounting debt, which otherwise seems impossible to pay.
Before discussing solutions to the loan problem, it is imperative that we understand that recovery from debt requires a lot of patience and discipline. There is no magic potion that will resolve things quickly. If you understand the logic, here are five critical steps to make yourself debt-free:
Manage Your Money
The initial step towards financial freedom is to take a look at your income and expenses. As a rule of thumb, you should be able to make more money than your expenses.
Whereas income is not easy to increase, cutting expense is immediately possible. To curtail your expenses, take these three important actions.
First, write your income and expenses on a piece of paper. It’s important because writing your budget can help in getting a broader picture of your financial condition, enabling you to make a coherent strategy.
Once you have proper insight into your income, expenses, and loans, it’s time to get rid of luxuries and items that you don’t need. Perhaps, it may be better to sell something that isn’t needed anymore.
As a final step, tear up all your credit cards to get rid of the temptation to pay from credit. You may keep one credit card with low monthly fees to pay for emergency, if required. Otherwise, it will be impossible to get out of the debt, if you’re using the card to pile up additional payments.
Creating a financial budget is simple, but it is also your lifeline to a healthy and debt-free life. Therefore, don’t wait for anyone to bail you out; instead take control of your life because money matters.
Make Realistic Goals
Once you’ve decided to manage your cash, it’s time to get realistic. Creating a budget and realistic planning are two different aspects of money management. For instance, you can create a great budget by including every kind expense and income; however, the budget may not be practical.
Don’t lie to yourself! You need to give yourself a chance to survive; therefore, your financial figures must make sense. If you have an expensive club membership, don’t ignore its ramifications. You either need to justify all the extra charges that you will pay to the club every month or you need to get rid of that expensive membership, immediately.
As a rule of thumb, your expenses should also include 20% miscellaneous charges, reflecting unexpected expenses. Including these extra charges in a budget may seem harsh on someone who is already struggling with their financials, but these supplementary expenses are paramount to the success of your plan.
Regarding these extra charges, you must realize that you will be living hands-to-mouth for the next few months until your plan begins to pay off. Under these circumstances, a sudden emergency can immediately disrupt all your planning and efforts in an instant.
If you have a plan to deal with the emergency, you will definitely be in a great shape, afterwards. After all, you don’t want to lose the path to financial freedom.
Setup an Emergency Fund
As suggested, an emergency fund is vital to proper planning. While allocating 20% additional funds to take care of unexpected events can put you on the right track, it’s not an alternate to emergency funds.
An emergency fund is a fund explicitly set for emergencies. Before rolling out your plan, think about different methods that you can use to create the fund. Perhaps, you may need to dispose of an asset to create an emergency fund. The asset can consist of your personal belongings or it can be your savings in the bank. If you don’t have anything to dispose of, take a look around your garage to see if there is something that can be sold to make the extra income. Putting cash in the fund can also be done by replacing your new car with an older model.
Starting another part-time job is also a great way to put cash in the emergency funds. Similarly, any source of income that can supplement your job will bolster its funding.
It may not be easier to take these life-changing decisions; however, you will come out of the situation stronger and more confident in your abilities to confront life challenges. Just make sure not to take anything out of the emergency fund until you have achieved your goal of a debt-free life.
Stop Deferring Bill Payments
Making late bill payment may seem like a good option to defer payments for as long as you can, but it is a recipe for disaster. Late payments always include hefty fines, which can quickly spiral out of hands when overlooked.
A simple method to tackle late payments and extra charges is to pay in cash instead of using the credit card. By now, you may have gotten rid of all your credit cards, which can accumulate a lot of interest. Accordingly, try to avoid penalties and high fees by cutting back your major expenses such as fees associated with financial transactions.
It’s also a time to talk to your credit card company asking them to negotiate a payment plan that can help you. Before picking up the phone, carry out research to find competitive offers that encourage you to get rid of your old credit card company.
Once you have a fair idea of competing offers, pick up the phone to call your credit card company informing them of such offers. Almost every credit card company has a customer retention department that is trained to offer better pricing to customers who want to leave. If you’ve done your homework, you can make your lender negotiate with you on better terms.
If this is not possible, all you have to do is to go to the competing company to make life a little easier. You can even repeat the same strategy with all your lenders before getting rid of your credit cards. This will allow you a chance to negotiate a better price without giving a sniff to lenders that you have made up your mind to spend frugally.
Change Your Lifestyle
As a human, it’s our natural instinct to find creative ways to entertain ourselves. Entertainment can include eating out in lavish restaurants; drinking expensive beer; spending on gyms; and buying vehicles to impress others. In this cycle of spending, we almost forget that the lavish lifestyle is destroying our lives.
In fact, these habits are sometimes as addictive as smoking and taking drugs. Due to our social bonds, bad habits are not visible until we start taking notice of these luxuries. For example, eating out instead of taking home-cooked food is considered normal even when eating out makes up the brunt of our expenses. Similarly, it’s common to find two or even three vehicles in a typical U.S. household, particularly when both parents are working.
In reality, it may make more sense to get rid of one vehicle as the additional loan on that vehicle can often pay your loans for at least one or two major debt items every month. Meanwhile, start using public transportation, if possible. Otherwise, buy a smaller car or an older model, which can help save enough to pay for debt. After you’re debt free, you can always get your car back.
Identify your biggest spending areas and plan your budget around those. You can survive without eating in restaurants and sitting with friends in high-end bars. Think about things that you can do on your own from mowing your laws, changing the oil in your car, and using the jogging track instead of a gym. Saving these expenses will allow you to spend that money on paying your bills instead.
It may sound strange but getting out of bad debt is more of a mental game than perfect planning. Many individuals make plans that look good on paper, but executing those plans is an entirely different ball game. Before taking the most important leap in your life, prepare yourself mentally and physically to face the challenges that can make you a better person, forever.
If these changes look intimidating, it’s time to get the assistance of a professional, such as Dutchess Partners, who can help you get a low debt consolidation loan. As its name suggests, the debt consolidation loan can help in a variety of ways including setting up an emergency fund or paying heavy credit card expenses. Dutchess Partners is an experienced firm that can help you chalk out a definite plan to get rid of the debt more quickly than you may have imagined.
