Debt is heavy. It sits on your shoulders and weighs you down. Debt is also addictive. It’s easy to throw something on credit when you don’t actually have the money to buy it. It gives you instant gratification, and that can feel good – in the moment.
But, for many people, there comes a point where they can’t use their credit anymore and debt is all they are left with. The stress of having to pay it all off can take its toll on your happiness and health, so you must come up with a way to get out of debt and start living a debt free life. Following are two things that will help you get out of debt once and for all.
Create A Debt Repayment Plan (And Include The Interest)
According to Gail Vaz-Oxlade, the bestselling author of ‘Debt-Free Forever’ and ‘It’s Your Money’, you need to face your debt head on and create a debt repayment plan. While you may be tempted to go in and talk to a banker, she says that they are not your friends when it comes to paying off your debt. They don’t want you to get out of debt because when you are in debt, they are making money. Therefore, getting out of debt is something you need to do by yourself.
In order to create a debt repayment plan, you must take into account any interest you have on your debt. For example, if you have a balance of $3,768.75 on a credit card, and you want to pay it off in exactly 1 year, you will need to pay $314.06 per month to pay the principal on the balance. However, there is still monthly interest to take into account. If you are being charged $66 in interest every month, then you will not be able to pay off that credit card in 1 year simply by paying the principal. You have to pay both the principal and the interest each month, for a total of $380.06.
Being completely honest with yourself about how much debt you really have (interest included) will get you motivated to take action on paying it down. That interest could be spent on much better things!
You may need to find a new source of income to pay it down or you may need to take longer to pay it off. But, remember, the longer you take to pay it down, the more you will be flushing down the toilet in interest.
Focus On Your Smallest Balances First
Dave Ramsey, a financial author and radio host, has a method of getting out of debt called the ‘Snowball Method’. If you seriously want to get out of debt, you will use this method in your debt repayment plan.
I’m warning you that this will require a change in your behavior. Using this method is powerful, but it means that you won’t be able to buy new clothes, tools, or toys whenever you want. It also means that you will be moving quickly towards a debt-free life where you don’t have to feel guilty and stressed about how much money you owe.
What Dave recommends is paying the minimum balance on all your credit, except for the smallest balance. On that balance, put as much as your monthly budget will allow. In addition, if you get extra money coming in for the month, put it on the smallest balance also.
Once you pay off the lowest balance owning, add that payment to the minimum payment of the next lowest balance. For instance, if you were paying $300 a month on your last balance, and you are paying $66 on your newest lowest balance, then start paying $366 on your newest lowest balance. That’s $300 more than you were paying, and it will increase the speed at which you pay off that balance.
Once you pay off that balance, move on to the next lowest balance you have and add the $366 to its current monthly payment. Keep doing this until you have paid off all of your debt!
This will require you to make paying off your debt of utmost importance. When you have the belief that your debt comes first, you will be much more likely to say no to those extra things you don’t really need and, instead, focus on getting out of debt.