Has your debt been weighing you down? You might be sick and tired of your debt and ready for it to be gone. Let’s be honest, the borrowing cost of debt is high as interest adds up fast. As part of the new year, maybe one of your goals is to pay off debt. Here’s how you can get finally get out of debt.
To get out of debt, you need to take a good hard look at the numbers. This part can be tough, but it’s necessary. First, you’ll need to gather all of your data including:
You can use this debt schedule template for reference:
Gathering this information can help you create a plan of attack so you can finally conquer debt. Not sure who your lender or loan servicer is? You can typically find that info on your credit report. You’re entitled to your credit report for free once each year at AnnualCreditReport.com.
If you want to pay off debt fast, there’s no working around it — you must pay more than the minimum payment. However, there may be the possibility of having a limited set amount of money to work with. So how can you make that happen?
Start by reviewing the money that comes into your account and the money that goes out of your account. Find your paystubs or go through your bank account to see how much money you get paid for your job. You want to see the exact amount, after taxes, so you know exactly how much you have.
On the other end, go back over the past 30 to 60 days of expenses. It’s key to understand what your expenses are and see where your money is going.
There are two types of purchases: needs and wants.
Needs are considered to be shelter, food, and transportation. These are items that you need to survive each day.
Wants are those things that you like but you don’t really need. For example, brand new clothes or monthly subscriptions. When reviewing your expenses, mark the category of each expense so you know if it’s a need or a want.
Rent — need
Groceries — need
Netflix — want
Insurance — need
Starbucks — want
Having a list of all of your expenses from the past month or two, divided up into these two categories will help you with the next step.
After getting into the nitty-gritty with your income and expenses, it’s time to make some adjustments. Where can you slash your expenses? Which ones can you ditch completely?
You don’t have to give up everything fun, but you want to cut back where you can to focus on debt repayment.
A good strategy is to focus on the expenses that are the largest part of your budget. For many people, those expenses are the rent/mortgage, groceries/food, and cars/insurance.
Right now, due to the pandemic, many car insurance providers are reducing rates when requested. This is due to fewer people driving. Landlords may be willing to be flexible during these times if you want to negotiate your rent.
When it comes to food, you can limit your take-out orders and start batch cooking to make everything easier and more affordable.
Take a look at your expense list and review the “wants”. Can you ditch some of those, or cut back slowly? Cutting back isn’t fun, but remember, this can help get you started with handling personal finances. Keep debt freedom as the goal. Here are some sites that can help:
Cutting back is one way to free up money to put toward debt but there is a limit to slashing expenses. When you hit that limit, you might find yourself stuck. What else can you do now?
Another strategy to employ is earning more. By earning more, you can give yourself the money you need to start paying more than the minimum on your loans so you can get out of debt fast. Doing so can lower the overall borrowing cost.
You can start a side hustle to earn additional income. Utilize your unique skills to earn money. For example, you could do things like — being a graphic designer, a tutor, a translator, a dog walker, Uber driver, grocery or food delivery, selling jewelry, and more. Check out sites like:
You can also sell things on Etsy, Facebook Marketplace, and OfferUp. Additionally, you can try your hand at freelancing and using social media and word of mouth through friends and family to get started. Earning more on the side can boost your income so you can pay down debt faster.
When you’ve been paying off debt for so long, it’s easy to succumb to debt fatigue. That’s why it’s important to have a repayment strategy that helps hack your motivation. You can choose the debt snowball method or the debt avalanche method.
Debt snowball — pay down the smallest balance to start, while paying the minimum on all loans.
Debt avalanche — pay down highest interest debt to start, while paying the minimum on all other loans.
The snowball is often touted for its boost of motivation as you feel like you’re paying off debt faster as you attack the loans with the smallest balance first. The avalanche is good to save money on interest and pay more towards the principal balance.
You can use a different type of debt schedule template based on your repayment strategy.
In this case, you’d throw extra funds toward the smallest balance. Once that first smallest balance is paid off, you throw your extra money toward the second smallest balance. You continue this until your loans are paid off. Here’s a debt schedule template for the avalanche method.
For the avalanche repayment strategy, you list your highest interest debt first and put all your extra funds toward that loan, while making minimum payments on everything else. Then you focus on the next highest interest and continue down the list until your debt is gone. Typically credit card debt has the highest interest rate, so in many cases that will be your focus under this debt repayment strategy.
The borrowing cost of debt can be high because of the interest that accrues and how long it takes to pay back debt. After reviewing all of your numbers, make a plan and set a debt-free date. It could be months away or years away. Don’t get discouraged.
Having a plan now will help you pay off debt later, so you can be free from debt once and for all. Getting out of debt isn’t easy but you can do it with consistency, regardless of how long it takes.
Taking the steps to get out of debt gets you one step closer to financial freedom. Bank with Greenwood to help you build wealth and get your money right while giving back and supporting Black and Latino communities.