Getting Out of Debt

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Has debt become an overwhelming part of your life? I understand and I can relate.  It feels like no matter how hard you work the money just doesn’t go far enough.  And it only gets worse when you have kids asking you why we can’t go out to eat every night or why aren’t we going to Disney World every other weekend.  

If you have come to the point in your life that you are ready for some debt management to change your financial picture, these tips will help. Debt management involves repaying your debt to get back your financial stability and security. You will have to start with taking a real look at your financial situation, then taking real action to put into effect strategies that will get rid of the debt you have and minimize future debt accumulation.

These steps are important for many reasons. It will help give you control over your finances by reducing the burden of debt payments and avoiding those nasty interest charges. You are also going to improve your creditworthiness, making it easier to access loans or credit in the future. Successful debt management can take away stress and anxiety, believe it or not the stress and anxiety from financial worries affects everything including the relationships around you. 

Different Types of Debt

Credit card debt, which usually has the highest interest rates, because it is what is called unsecured debt.  Meaning all they have is your word that you will pay the loan back and unlike secured debt (a house or car) that banks can take back something to possibly get some of their money back. Credit card debt can add up quickly and become a real problem when the minimum payments adding up to hundreds of dollars.  

Student loans, this is a sore spot for me, I too have been saddled with student loan debt for the majority of my adult life, and it wears on you.  If these loans are not paid back soon after graduating school they can carry on and affect your financial future stunting your ability to save, invest, or achieve other financial goals. 

Mortgages, secured loans, are considered a “good debt” . There are advantages and disadvantages to these loans especially if you bought at a time of high interest rate or bought your house for over market value and now have a large mortgage.  The subject of whether to buy or not to buy a house will have to be covered in another article.  For the sake of debt, if you can really afford your mortgage and it doesn’t make you house poor (when paying for your house leaves you with no money to live on)  I would say owning a house is a “good debt”.

The impact of debt extends beyond financial constraints; it can also take a toll on mental health. Constant worry about debt payments, fear of bankruptcy, and the feeling of being trapped in a cycle of indebtedness can lead to stress, anxiety, and even depression.

Addressing debt is a large part of creating a financial plan. Ignoring or neglecting debt can make small  financial problems much bigger and put a wrench in long-term financial security. By understanding  the types of debt you have, its impact on your life, and the greater benefits of paying the debt off you will be able to relieve your financial burdens and achieve greater financial freedom and peace of mind.

Paying down debt

When it comes to paying down debt, there are a few strategies to consider, each with its own benefits but which one you choose will ultimately be the one that fits best with your situation.

Debt Snowball Method: This method involves prioritizing debts from smallest to largest balance, regardless of interest rates. While paying the minimum on all debts, any extra funds are directed towards the smallest debt. Once the smallest debt is paid off, the payments from that debt are rolled into paying off the next smallest debt, creating a “snowball” effect. Want to see it on paper? Grab this free debt snowball tracker fill out your debts on the paper and watch how using the debt snowball method will starts to reduce your debt.

Debt Avalanche Method: In contrast to the debt snowball method, the debt avalanche method prioritizes debts based on their interest rates, starting with the debt carrying the highest interest rate. By focusing on high-interest debts first, individuals can save money on interest payments over time, potentially paying off debts more quickly.

Debt Consolidation Options: Debt consolidation involves combining multiple debts into a single loan with a lower interest rate, typically through a personal loan, balance transfer credit card, or home equity loan. Consolidating debts can simplify repayment and potentially reduce overall interest costs, making it easier to manage debt. This is a great method to use especially if you can get a lower interest rate, however there are two big requirements to make this method work. You must after you consolidate, cut up your credit cards and have a solid debt repayment plan for the amount you borrowed and be committed and disciplined to paying the money back. If you don’t follow those requirements you will most likely end up in the same situation again. 

Negotiating with Creditors: It’s often possible to negotiate with creditors for more favorable repayment terms, such as lower interest rates, extended repayment periods, or settlement offers. Communicating openly with creditors and explaining financial difficulties can lead to mutually beneficial solutions that make debt repayment more manageable.

Increasing Income to Pay of Debt Faster: Finding ways to increase income, such as taking on a part-time job, starting your own online business, freelancing,  selling digital products or selling unused items,  can provide extra funds to put towards debt repayment. Increasing income will make the debt payoff process move much faster and reduce overall interest costs.

By exploring these different ways to pay down debt and selecting the avenue that works best with their financial goals and circumstances, you can make huge strides towards achieving debt freedom and improving your financial well-being.

Making a Plan of Action

Paying down debt requires careful planning, strategic decision-making, discipline and commitment.  Starting with:

Budgeting and Tracking Expenses: Creating a budget allows individuals to allocate funds towards debt repayment systematically. By tracking expenses, they can identify areas where spending can be reduced or eliminated to free up more money for debt payments. It can be overwhelming to start a budget, I have created a Budget Basics ebook that guides you through how to fill out a budget including is a 40+ budget planner with debt and savings trackers.

Prioritizing High-Interest Debt: High-interest debt, such as credit card debt, can quickly build up and get out of control, having even minimum monthly payments be unaffordable. Prioritizing repayment of these debts can save money on interest charges over time and accelerate the overall debt payoff process.

Creating a Repayment Plan: Developing a structured repayment plan will help you stay organized and focused on your debt reduction goals. This plan should outline how much will be paid towards each debt, the order of repayment, and a timeline for achieving debt-free status.

Cutting Unnecessary Expenses: Identifying and cutting unnecessary expenses can significantly increase the amount of money available for debt repayment. This may involve reducing the  spending on wants, finding more affordable alternatives, or negotiating lower bills. A great way to get started with this would be a Savings Challenge.

Seeking Professional Assistance if Needed: For individuals struggling with overwhelming debt or facing complex financial situations, seeking professional assistance from credit counselors can be beneficial. These professionals can provide personalized guidance, debt management plans, and negotiation assistance to help individuals regain control of their finances.

By implementing these debt repayment strategies and staying committed to financial goals, you can make significant progress towards reducing debt and achieving greater financial stability and freedom.

Benefits to Paying off Debt

Paying down debt offers numerous benefits that extend far beyond just financial freedom. It can significantly reduce stress and anxiety associated with debt burdens. The weight of financial obligations can take a toll on mental health, and by eliminating debt, you can have relief and peace of mind.

Another benefit to paying down debt can lead to an improved credit score and overall financial health. A higher credit score opens doors to better loan terms, lower interest rates, and increased access to credit, ultimately strengthening your financial position.

Additionally, reducing debt provides increased financial flexibility and freedom. With fewer monthly debt payments, individuals have more discretionary income to allocate towards savings, investments, or other financial goals. This type of flexibility allows for greater control over your financial future and the ability to respond to unexpected expenses or opportunities.

Paying down debts creates opportunities for pursuing long-term financial goals, such as saving for retirement, purchasing a home, or starting a business. By freeing up resources previously allocated to debt repayment, you can prioritize these goals and work towards achieving greater financial security and independence.

The overall benefit of paying down debt leads to a better quality of life, including reduced financial stress, improved financial health, increased flexibility, and the pursuit of long-term dreams. You will feel empowered once you take control of your finances and build a more secure and fulfilling future.

Getting It Done Quickly 

Paying down debt quickly requires a proactive approach and disciplined strategies. Here are some effective methods to accelerate debt repayment:

The increased income from side hustles or freelancing can provide additional funds to put towards debt repayment. Freelancing in your area of expertise, think about a hobby or your job that you know lots about and like to share what you know, you can take that knowledge and create things like digital products to sell. There are also side hustle like driving for a ride-sharing service, or taking on part-time work, finding ways to boost your income can significantly accelerate your debt payoff journey.

Selling unused items or assets can generate immediate cash that can be used to pay down debt. Consider decluttering your home and selling items through online marketplaces, garage sales, or consignment shops to quickly raise funds for debt repayment.

Putting windfalls or bonuses towards debt repayment can provide a substantial boost to your efforts. Instead of splurging on unnecessary purchases, consider allocating unexpected sources of income, such as tax refunds, bonuses, or inheritances, towards paying off debt.

Automating payments can also help you avoid late fees and stay on track with your debt repayment plan. Set up automatic payments for your bills to ensure timely payments and avoid penalties that can hinder your progress.

Staying focused and motivated throughout the process is essential. Set specific goals, track your progress, and celebrate milestones along the way. Keep reminding yourself of the benefits of becoming debt-free and stay committed to your financial goals, even when faced with challenges or setbacks. By implementing these strategies and maintaining a positive mindset, you can pay down debt quickly and achieve financial freedom sooner.

To Pay Debt or Invest?

When it comes to managing finances, individuals often face the dilemma of whether to prioritize paying down debt or investing their money. Understanding the dynamics between these two options is crucial for making informed financial decisions.

To put paying debt versus investing or saving into perspective we have to talk about the opportunity cost of debt. By carrying debt, you are paying interest on borrowed money. You are paying anywhere from 18%-29% to hold on to a debt where as if you were saving you would only be making 4%-6% so if we compare those rates you are paying out way more than you are earning.

I am not saying to not have any savings at all, I am saying build yourself up what is called an emergency fund (1-3 months of your monthly bill amount) keep that on the side for any type of unplanned event.  Then focus on paying off your debt before you start investing.  

Considering risk factors and time horizon is also vital. Debt repayment offers a guaranteed return in the form of interest savings, while investing carries risks and uncertainties. You must assess your risk tolerance and time of investment to determine the best balance between debt repayment and investing.

Balancing debt repayment with saving and investing goals is essential for long-term financial success. While paying down high-interest debt should generally be prioritized, neglecting savings and investment contributions can hinder progress towards future financial goals such as retirement or homeownership. This is why your financial picture has to be looked at as a whole, not just piece by piece. The budget planner will have you write down and assess not only your current situation but your goals for the future and help you plan accordingly. 

Ultimately, developing a personalized financial strategy based on your circumstances is key. Factors such as income level, debt load, investment goals, and risk tolerance vary from person to person, necessitating a tailored approach to debt repayment and investing. By carefully weighing the pros and cons of paying down debt versus investing, you can make informed decisions that align with their financial objectives and lead to greater financial security and prosperity.