You know what annoys me? The fact that I get 20-bajillion credit card offers in the mail each week! You would think that they would stop sending them after I ignore the first million, but they keep on coming.
Part of the reason these offers keep on coming in the mail is that people continue to sign up for them each and every day. We as a society need to collectively ignore the offers until it becomes more trouble for the credit card companies than it’s worth.
Credit card companies have gotten excellent about making debt their business and selling you on a “pay it off later” mentality. Unfortunately, many people make ends meet each month by relying on credit cards.
Debt can bring down a person and has ruined countless people’s futures, marriages, and lives. Cost of living increases, but jobs aren’t paying much more, so many turn to credit cards for the solution.
Luckily credit card debt doesn’t have to take control of your life. Today we are going to take the first steps of getting you out of your debt and back into control of your financial life.
The most important thing to remember about debt is that no matter how deep you are in there is always a way out and staying positive is key!
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Step 1: Write Down Your Debts
The first step is to identify how much you owe and how many debts at what interest rates. For example, you might have three credit card debts:
- $1,000 at 13% interest
- $3,000 at 15% interest
- $10,000 at 22% interest
It’s ok to take a break if you are feeling stressed. I would recommend taking a walk or getting some exercise, which is proven to increase mental health. Come back with a clear head and go at your own pace.
Step 2: Identify Your Spending
We often come into debt because we are living above our means or are struggling to make ends meet, spending more than we earn. We need to take a look at your spending to see where your money is going, are you living too lavish for your income, and what sacrifices you can be making.
The first question I want to ask you is, “Do you have a budget?” If the answer was no, then you need to make yourself one.
I recommend creating a budget in Excel that tracks your spending each month. You should create spending categories such as groceries and auto repair that you put a set amount of your paycheck towards each month. If in January you dedicate $400 to groceries, but only spend $350, then you should start February with $450 in groceries as $400 is your monthly deposit and $50 is carry over from the previous month.
Identify the luxuries you are taking in life and slash as much of them as you can. $4 Coffee each morning is expensive when you can make coffee much cheaper at home. If you spent $4 on coffee each workday that equates to $80 a month that you could use to pay off your debt.
Other everyday luxuries that people spend their money on that could be cut to pay off debt, are eating out, alcohol, chips, tobacco, and soda. Remember your goal is to get out of debt and sometimes that means cutting out the fun things in life. Everyone’s situation is different, and you will need to find out what works for you.
Creating a budget is going to take some time, and it won’t be an easy process. Budgets often take continual refinement to nail down your spending habits. Don’t forget to plan for an emergency fund to catch life’s little accidents.
Feeling stressed? Money issues can be stressful, and it’s ok to take a break and come back to this later. Just remember you are making progress to securing a better future.
Step 3: Identify Moneymaking Opportunities
Moneymaking is all about how much cash flow enters your bank account versus the cash flow leaving your bank account. In your situation, you need to make money to pay off your debt and continue that habit to stay out of debt.
Quick Cash: Sell Unused Items on Craigslist
Do you need cash fast? One of the best ways of getting money fast is to sell things on craigslist that you aren’t using anymore. It is a little sad to see something you bought for $50 sell for $20 now, but we need to try to get into the habit of not accumulating things we won’t use later.
Can you work overtime? Working your same job and longer hours can lead to a mundane and depressing lifestyle, but it is a good way of making some extra money in a time of need if the opportunity exists.
Find Part-Time Work
Do you have time for a separate part-time job? Look for what works best for your schedule. If you can only work weekends, consider looking at pizza delivery or bartending, which tends to make great tips and tend to have more weekend work available.
Also, you can post that you are looking for odd job work on craigslist. The key is to make some additional money so you can pay off your first debt quickly. Once that first debt is gone, you’ll feel the burden lifted some and give you the motivation to pay the rest off quickly.
Step 4: Decide on Your Attack Plan
Now it is time to decide how you are going to pay your debt off. There are a lot of different methods to paying off your credit card debt, but you’ll need to figure out what works best for you.
Grab your list of debts you made from step one, take a breath, and get excited because you’re about to kick some serious debt to the curb!
Dave Ramsey Debt Snowball
Dave Ramsey, financial expert, and creator of Financial Peace University, often talks about the debt snowball. This method is more focused on paying off the easiest debt first to build motivation that you can do it, but it ignores interest rates meaning it might take you longer to pay off all your debt.
In the example from step 1, Dave would have you pay off the debts in the order of $1,000, $3,000, and finally the big $10,000. As you pay off the first debt of $1,000, you continue to make the minimum payments on the $3,000 and $10,000 debts while putting your extra debt payment money into the $1,000 loan until it’s paid off.
Highest interest rate first strategy
The highest interest rate is all about killing the loan that will build up the fastest. In our example, this is the $10,000 loan at a whopping 22% interest. While paying off the big loan, you still make the minimum payments on the other two smaller loans.
This is a useful method for paying loans off faster, but it tends to be more depressing of an approach because it doesn’t get rid of a loan quickly and there are no little victories of paying off small loans quickly.
What is your favorite way of paying off debt? Please let us know in the comments below!