No matter what type of debt you have, trying to pay it off can sometimes feel hopeless. It might even seem like the more you pay, the more you owe. Sadly, that happens often when you're carrying high-interest rates on loans or credit cards. Thankfully, you can dig yourself out of debt. All you need is the right debt elimination plan. This repayment plan can help you repay your debt while building your credit. Here's how to do it.
1. Create a Debt List
To get the balling rolling, you need to create a list of all your debts. If you're not sure what all of them are, which surprisingly not everyone does, you can obtain a free copy of your credit report from your bank (some offer this service) or online. One once you have it, write down how much you are and the total payoff amount. Say you owe $25,000 in education loans. You've paid on time but can't make a dent in the interest. In addition to paying more each month, which may or may not go towards the principal, you could refinance. Refinancing student loans can help you pay them off faster, pay less interest, and keep your credit in good standing.
2. Evaluate Your Spending Habits
How you spend money is just as important as how much you spend. Look at your spending habits over the last few months. Do you see any patterns of overspending? Are there certain things you like to splurge on a bit too much? If so, create a budget that allows you to enjoy but not overboard. If you enjoy eating out, scale back to twice a month instead of weekly. Alternatively, you can opt for lunch specials instead of eating dinner out. The portions are usually about the same. However, it cost a lot less. You must also determine which bills are taking up most of your money. You may want to find somewhere else to live if it's housing costs. Housing costs should account for about 30% of your total monthly income.
3. Categorize Expenses
After paying for housing, you must itemize all of your other expenses. You can create a list similar to this one that includes groceries, utilities, transportation, insurance, entertainment, and savings. If you use credit cards, review your statements and see how much you spend each month. While doing this, you may see that you're spending far more than you thought. Once you pinpoint the source, tailor your spending habits to fit your financial needs.
4. Create Your Budget
Once you identify your spending habits, you can start crafting your budget. There are several types of budgets you implement. The first one is the 50/30/20 method. This method works by allocating 50 percent of your income to the cost of daily living. These include housing costs, debt, food, and transportation. The following 30 percent should be out towards things you like to do. The remaining 20 percent is towards your savings.
5. Use the Envelope Method
Next up is the envelope method. Just like the name implies, you take a certain amount of money and put it in an envelope each month. You can create different envelopes for all of your expenses as well as your mad money. Once that money is gone, you wait until the following month to start again. Remember that you're also supposed to be stashing money into a savings envelope that you don't touch unless there's an emergency. However, to save as much as possible, you're also supposed to create an emergency fund envelope. Starting at square one, you can try the zero-based budget. Under this model, you are starting from zero. Instead of sticking to a set way, you continually revisit your finances to tweak them. It's important to note that managing money comes with risks, so it's usually not the way to get your money matters in order.
6. Pay Down Your Outstanding Debt
After you create your budget, it's time to plan your attack. You can about this in several ways. However, the best way is one that you know you'll stick with. The two most popular methods to get out of debt are avalanche and snowball. If you choose avalanche, you first put as much money as possible towards the highest bill. Once you pay it off in full, you move on to the next. Snowball works in the opposite direction. Starting with the least expensive bill, you pay as much as possible until it's paid off. Then, you move on to the next one with the smallest balance. You continue to do so with all of your bills until they're paid in full.
7. Consider Your Lifestyle
Regardless of your payoff model, you need to consider your lifestyle. Some people go full throttle and downsize everything until they are debt-free. This is not for the faint of heart, so unless you know you can stick to it, you may want to start with minor lifestyle tweaks. Getting your finances in order doesn't mean giving up everything you enjoy. Sacrificing too much can backfire, prompting you to overspend and undo all of your hard work. It's better to scale back but still let yourself indulge here and there.
8. Tracking Your Progress
Watching your debt-to-ratio decrease is an excellent source of motivation. You can track it manually with a spreadsheet or use your credit report to see how far you've come. Since banks and credit cards offer free credit monitoring, you can log in once every month or so to see how far you've come. You can then use this information to decide whether to maintain your current strategy or create a new one.
9. Ask for Outside Help
Even with the best intentions to get things under control. If you find yourself in this position, you can ask for help. There are plenty of outside credit agencies that can help you regain control of your money.