Debt can be a heavy burden, causing stress and hurting your financial and sometimes even physical health. Fortunately, with the right strategies and commitment, you can reduce and eventually eliminate it for good. Below are are proven methods in greatly reducing or eliminating debt. Just remember there's no quick fix to addressing these issues. It's going to take time, discipline and effort to see real results.
Review your finances
The first step to getting back on track is to see where the train is. One way is to calculate your debt-to-income ratio using the following formula:
DTI Ratio = (Total Monthly Debt Payments / Total Monthly Income) x 100
A lower DTI ratio is generally better*
Create a Detailed Budget
Take the time to sit and write out a comprehensive budget that outlines your monthly income and all your expenses. Many people skip this step and don't understand why their plan isn't working. This is likely the most important step and will help you visualize areas where you could cut back or reallocate money towards debt repayment.
The 50/30/20 rule
One common budgeting strategy is what's known as the 50/30/20 rule. 50% of your income goes to necessities such as housing, utilities and groceries.
30% is for discretionary spending (I.E. dining out, entertainment and hobbies) and 20% goes to financial goals such as paying off debt or saving/investing.
Pay Yourself First Method
Another strategy is what's referred to as the "pay yourself first" method. It still requires you to budget but prioritizes savings. Following this approach, you would set up regular savings withdrawals per paycheck, typically to a pre-tax savings account, and set a budget with the remaining income.
The Avalanche Method
Not all debt is created equal. High-interest debts, such as credit card balances, can quickly spiral out of control. This approach prioritizes focusing on paying off high-interest debts first while making minimum payments on lower-interest ones. This method is recommended to save more money in the long run.
The Snowball Method
Unlike the Avalanche method, this approach prioritizes focusing on the debts with the smallest balance first. It could benefit those who have a hard time staying disciplined and could help psychologically by accomplishing small goals quicker. Once you knock out the smallest balance, immediately address the next largest. Keep at it until it's all gone.
Write Out a Debt-Payoff Schedule
Calculating a debt-free date or using an online debt payoff schedule to help visualize your goal can help to stay motivated. Personally, I prefer to have something tangible like a calendar rather than using an online application. There are too many additional distractions that come with being on the internet that could deter motivation.
Debt Consolidation
Find out the potential savings or costs associated with debt consolidation options like balance transfer cards or consolidation loans. Ensure that any consolidation option you choose actually reduces your overall interest costs.
Trim the Fat
Review your monthly expenses and identify areas where you can cut back. This could include dining out less, canceling unused subscriptions, or finding more affordable alternatives for everyday expenses. Redirect the money saved towards repaying your debt.
Increase Your Income
An increase to your income, even temporarily, could accelerate debt reduction efforts. Possible ideas include part-time work, picking up extra overtime hours, or selling unused items.
Stay Committed
Ridding yourself of debt is a marathon, not a sprint. Keep disciplined and patient. Stay committed to the plan, track your progress, and celebrate the small victories along the way.
Negotiate with Creditors
If you're really struggling to make payments don't hesitate to reach out to creditors. They may be willing to negotiate lower rates, reduced monthly payments, or even debt settlement options. Communicating with your creditors shows your commitment to repaying the debt and they'd rather get something instead of nothing. Just be aware of the impact this could have on your credit score and future borrowing potential.
Seek Professional Help
If your debt is too overwhelming or you're unsure where to start, consider consulting a financial planner or advisor. They can provide expert guidance and help you create a personalized debt repayment plan.
Your specific circumstances will determine which methods work best for you. No matter which you decide on, the most important step is the first. The longer you wait, the worse the problem becomes.
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