- Having some debt is usually okay. What's not okay is not having plan to pay it back...
Debt can feel overwhelming, whether you owe $1,000, $10,000 or $100,000. And they usually don’t teach classes in school on how to get out of debt, so you may have no idea where to begin getting on top of it. The good news is that it is possible, and bankruptcy does exist for people who don’t have any other options to give them a fresh start. However, long before you consider heading down that road, there are concrete steps you can follow to pay off whatever you owe.
Make Your Budget
The first two questions that you need to answer are exactly how much you owe and how much income you have. Next, you should take a look at your spending habits and figure out where you can save money to put toward what you owe. Apps can help you with your budgeting. Be disciplined, but don’t set unrealistic standards or you will struggle to stick to your budget. Figure out how much you can set aside each month for payments.
Have a Plan
You need a plan beyond just making minimum payments. There are basically two approaches you can take. One is to focus on paying off the debt with the highest interest rate first and the other is to pay off the smallest one first. The best plan is that one that will keep you motivated. Therefore, even though paying off the highest interest rate is technically the best idea financially, many people are more successful paying off their smaller debts first because it gives them extra motivation. Concentrate on one debt at a time, making minimum payments on the others. As you pay each one off, roll the total monthly amount you paid on the previous to the next one, adding the minimum payments as you go.
Consider Your Options
One thing to think about is whether you have access to assets you can sell or borrow against in order to pay off a debt. You should think about this carefully. Check interest rates, and make sure that you aren’t trading a low-interest debt for a higher interest one or that you aren’t cashing in an asset that earns more than you are paying in interest. One possible option is taking out a home equity line of credit if you own your house. If you want to find out more about whether this is a good choice for you, you can review a guide that also covers interest rates and tax treatments. You may also want to consider picking up a second job or some gig work and using the money you make from that to pay debts more quickly.
Have Emergency Savings
It’s a myth that most people go into debt because they are financially irresponsible. It’s much more common for this to happen because of financial emergencies that people do not have the money to cover. Therefore, you should also work on building up an emergency savings account. While this should eventually cover a few months or even a year of expenses, start with a small goal of just a few hundred dollars. This can help prevent you falling back into debt after you’ve gone to all the trouble of paying it off.