What is one thing that most consumers have in common? Debt. After years of worldwide financial turmoil, most people have racked up some kind of debt. This can be credit card bills, car loans, lines of credit or any number of other types of interest-charging loans. The problem with debt is that it can be difficult to get out of due to high interest rates and a general lack of understanding of how debt actually works.
If you find yourself facing a substantial amount of debt, don’t give up hope. Although being in debt often seems like you’re stuck in a deep hole, getting yourself out of it may be easier than you think. If you are serious about eliminating debt and setting yourself up for financial success in the future, here are twenty-one smart ways that the savvy consumer can erase their debt and begin building a solid fiscal lifestyle:
1. Avoid Any New Debt – The first step that you need to take in order to eliminate your debts is to stop making new ones. Apart from legitimate emergencies, stop putting additional charges on your credit cards, and don’t consider applying for any new loans.
2. Identify Your Long-Term Plans – Where do you want to be in the future? Set up long-term plans such as purchasing a home or being completely free of debt. Set dates for these goals to keep yourself on track.
3. Set Realistic Medium-Term Goals – After you know where you want to be, financially, over the next few years, you can start working on how to get there. Set up medium-term goals such as paying off specific loans or credit cards to make the whole process more measurable and reachable.
4. Set Up A Doable Budget – By determining where you want to go and how you’re going to get there, you have the information you need to set up a personal budget. Incorporate both long and medium-term goals by allocating a predetermined amount of money each month to paying down your debts.
5. Never Make Just The Minimum Payment – Making just the monthly payments on your credit cards will never get you out of debt. Many times, only a few dollars from your monthly payment goes towards your principal balance. The rest is applied to interest which means minimum payments are almost purely profit for your debtors.
6. Look At Your Different Interest Rates – If you have a number of different sources of debt, it is likely that you have a slew of different interest rates. Look at the ones which are higher and focus on paying those off first. The money you’ll save from these high-interest loans will allow you to pay off other debts faster.
7. Consolidate Your Loans – Consider consolidating all of your debt together. Many debt consolidation companies offer plans to reduce your overall payment by combine each debt into one lower-interest bill. This can save hundreds or even thousands of dollars each month for consumers with a large load of debt.
8. Refinance Your Home Or Auto To A Lower Rate – If you purchased your home or your car at a time when interest rates were higher, refinancing now can shave points off your current rate and save you significantly each month. This is, in turn, free money that can be used to decrease the rest of your debts.
9. Repair Your Credit – By working to improve your credit score you can put yourself in a better financial position. With a higher, more positive score, refinancing high interest debts to a lower rate is much easier and will save you money.
10. Reward Yourself For Good Financial Decisions – When you reach a milestone, reward yourself. Living without spending extra money can be difficult, so splurging every once in a while is acceptable. Don’t go out of control though, and limit yourself to a predetermined prize such as a small purchase or a short vacation, depending on your milestone.
11. Repay Debt First And Save Second – Saving is great, but not while your interest charges are accumulating. Besides setting an emergency fund aside, focus your free cash on paying down your high-interest debt rather than sticking it in a low-interest savings account or 401(k).
12. Negotiate With Your Lenders – Given the recovering financial situation of most large lenders, they are more likely the negotiate with you than ever before. If you simply cannot make your payments, talk to them and they will oftentimes be willing to lower your interest rate or consider alternative payment plans.
13. Be Frugal With Your Spending – If you’re trying to become financially responsible, then start with your spending. If you go out to eat twice a week with your family, consider cutting that number in half. A family of four can easy shed $200+ from their budget each month by shaving one trip to a restaurant weekly.
14. Don’t Become A Co-Signer – Co-signing on a loan or rental for a friend or family member is a nice thing to do, but not a wise choice if you’re having financial trouble yourself. Co-signing is putting yourself at risk of taking on more debt – even if the person you’re signing with has the best of intentions.
15. Hold Off On That New Car Purchase – Thinking about trading your older, paid-off car in for a newer model with payments? Erase that thought from your mind. Even a $300 per month car payment will add up to $3,600 per year – likely enough to pay off one or two small credit cards.
16. Student Loans Can Wait – If you still have debts from college, consider having your student loans deferred. This can be accomplished if you’re under financial duress or are currently unemployed. While deferring student loans doesn’t stop the interest, the rates with these types of loans are often some of the lowest consumers are faced with and can be saved until after higher-interest debt is paid. Whatever you do though, do not default on your student loans.
17. Focus On Bad Debt – There actually is good debt – debt on things that appreciate in value such as real estate. Bad debt on the other hand is things that provide no appreciation such as a vehicle or miscellaneous credit card charges. Focus on knocking these out before paying down good debt.
18. Consider An Employment Upgrade – Talk with your employer are promotional opportunities and raises. Often times, employers look favorably upon employees who complete educational or training programs aimed at career advancement. Even a small increase to your salary can mean extra cash for paying down your debt.
19. Talk With Friends And Family – Although many people stray away from borrowing from friends and family members, it can sometimes be the most effective way to reduce debt. Replacing a high-interest debt with a low or no-interest loan from someone close to you can get you out of financial trouble in no time at all. Be careful though, and never set up any arrangements with family or friends that you may not be able to uphold.
20. Seek Professional Credit Counseling – Professional credit counselors work to get people out of debt. They are experts in reducing the amount you pay each month, and can not only advise you on the best practices for becoming debt-free but can often negotiate with creditors on your behalf.
21. Consider Strategic Bankruptcy – In the worst case scenario, strategic bankruptcy may be your best option. If you are so far underwater with debt that there is no feasible way for you to get out, bankruptcy may be your only option. Consider the amount of time that it will take you to pay down all of your debt, and compare that to how long bankruptcy will affect your credit profile.
The most important key to getting out of debt is to carefully plan your journey. Facing a wall of debt without a plan will almost always result in you throwing money away in unnecessary interest payments. Poor planning will also lengthen the time you are in debt, and the longer your debt is carried, the harder it is to eliminate. By following these twenty-one tips, you can ensure you are on the fast track to financial freedom from your debt and a much more enjoyable life.