You already know that in order to get out of debt, you will need to spend less than what you are earning and use the unspent money to pay off debt. That’s at least the rule of thumb, but if you are like many others who may not uphold that commitment to spend wisely and follow tight budgets, you want to create a specific game-plan. You need a goal that motivates you. A good goal can help you speed up your loan repayment duration. Getting out of debt is a life-changer to many people because it opens up many opportunities including access to better interest rates. Many people try to blindly make minimum payments as required and never think decisively how they will get out of the debt fast. Here is my five year plan that is used to get out of debt.
Re-organized My Debts
Unless you know what you are paying and how it affects your finances, and the duration of payment, you may be doing too little to save yourself. Loans need to be organized by listing them down, calculating the amount you ought to pay, and understanding the best approach to use.
When you list the debts and prioritize them, you find that you can clear them within a reasonable period. You want to start with those debts attracting higher interest rates. People may be tempted to start paying off debts will small interest because they can be cleared fast, however, on the other hand, it will be allowing those debts attracting higher rates to grow big. I re-organized my debts and paid them off based on their interest rates.
I Created A Starter Emergency Fund
Emergencies can arise anytime without notice. When they strike, emergencies can take away the money you have raised to pay off debts meaning you find yourself having penalties or not paying the loans. Establishing a kind of emergency fund provides a buffer between you and the debt. This is what I did to protect myself and prevent plunging into more debt.
I Put Up A Budget and Strictly Adhered To It
You want to track your income as well as expenses. You will know where much of your money is going, and how you can reduce the expenses so that you increase the amount for debt payoff. A budget shows you whether you have surplus or deficit in your spending. A surplus means you have money left after spending that you can use to pay off debts. A deficit means you might be headed to creating more debt. A budget helped me reduce my spending.
I Tried Earning Extra Money
Nowadays, there are many ways people can make extra cash. In the event that you want to clear your debt, you need to consider earning extra cash that you put towards clearing your debts. You can do some freelancing, baby sitting, pet sitting, or allowing your car to be a moving billboard. Don’t use the extra cash to plan for your next holiday or any sort of spending. I used the extra money I raised to pay off the debts.
Use the snowball effect or debt laddering in paying your debts. When you clear with the first debt, the money you used to pay it off, you can use it on the second loan together with the minimum payment. The same happens when you clear the second loan and move to the third one. The payments will keep on growing and growing, something that accelerates the rate at which you knock down the balances. Alternatively, you can use the snowflake method where you make several payments in addition to the minimum payment for each debt. The smaller payments can be spread out throughout the month.