6 Simple Steps to Get Out of Debt
Debt happens. It doesn’t matter whether you put yourself in debt or if you’re a victim of circumstance. What is important is how you deal with it. Take the first steps towards fixing it today.
Look at your past budget
Do you have a budget that shows how much you’ve spent in the past six months? If you answered, “No,” it’s time to create a budget. To get out of debt, you have to figure out how you got into debt in the first place.
Visualizing every purchase you make can help you cut back your spending. Instead of being a hypothetical number in your head, your spending habits are displayed in front of you. This can help you decide how to correct behaviors that encourage debt.
Your budget should be as complete as possible. Assess all of the purchases you’ve made, then create groups from these purchases that outline what types of purchases you are making. Some groups in your budget might include:
- Car Payment
From these groups, create a liberal estimate of how much you’ve spent. Itemize your budget and be precise about each purchase you’ve made.
Make sure to include your income in your budget. It’s one thing to see how much you are spending. It’s another thing to see how much you are spending compared against how much you are making.
Create a spending plan
You should try to pay off all of your debts. You also have to take care of your monthly needs. With your itemized budget, you can see how much you spend to get by.
Allocate a small amount in your budget for emergency purchases. One of the reasons you may be in debt is because you didn’t plan for emergencies. If an emergency doesn’t happen that month, you can roll that amount over to next month. This gives you a larger emergency budget just in case.
Allocate a “pleasure” fund. Cutting your spending cold turkey can lead to splurge buying.
Splurge buys are purchases that you make because, emotionally, you have justified them. This might be a coat that was too expensive, a meal that cost a bit too much, or something else entirely. These are things that you might have looked at and thought you deserved. While you can splurge every once in awhile, you have to be cautious.
Splurge buys are also impulse buys. Very rarely do you plan to buy that splurge item. Since it is emotionally motivated, you might have been fighting against it for a long time. However, you probably ended up splurging. It’s a habit that is hard on your budget, and fighting it will help you save money.
Need help creating a spending plan? This handy spending plan guide can start you in the right direction.
Sell what you can
If you can sell your house fast and downgrade to a smaller space, you should. One of the biggest causes of debt is a house that is far too big. Large houses are less practical and mostly symbols of status.
If you’re in more debt than you can handle, you have to sell everything you can, including any personal items that might be important to you. Your debt requires you to make hard decisions. Are you willing to part with furniture, cars, and even heirlooms?
Don’t be overzealous. If you are rushing to the pawn shop to sell your grandmother’s ring, think twice about the long-term effects of that sale. Only sell what you truly don’t mind parting with. Negotiate heavily with yourself about what you can sell. At the end of this arduous process, you should be living comfortably, maybe even a bit spartan.
It doesn’t matter if it is $10 or $10,000. Save what you can when you can. You are in debt, so the important thing is that you start to save. If much of your income goes to debt repayment, then your savings may be minimal.
Your savings should not be touched unless there is an emergency. If you ever get into debt again, you have your savings to fall back on.
Your emergency budget should have a target of $1000. This should prevent you from resorting to credit cards when in a tough situation.
Assess your career situation
If you are putting in 40+ hours a week at work, but you are still financially struggling, it might be time to have a chat with your boss.
If you think you’ve been getting a small paycheck for the work you do, you’re not the only one.
A report from Rutgers University found that the American workforce as a whole is severely underpaid.
If you are struggling, get aggressive about your financial accumulation. Talk with your boss about creating a plan to get you to a certain salary. If your boss balks, consider (on your own time) other employment opportunities that will advance your financial status.
Be polite. Treat all of the people in your career with respect. They are often in similar situations. The difference is that you are the one working towards improving.
Look at debt consolidation
If you are dealing with a variety of different debts, consolidate them. Debt consolidation allows you to withdraw a loan and repay many of your debts with a single loan that has a single interest rate. When it comes time to make payments, you only pay towards one loan and not the multiple sources of debt you had before consolidating.
If you’re looking to save even more, you could also negotiate interest rates to be a bit lower with your debt consolidation advisor. That way, you can save more each month and pay more on your debt down the road.