After I took the time to calculate my debt-to-income ratio, I’ll have to admit that I was a bit overwhelmed. As I’ve said before, I want to improve my credit rating and it’s a really important goal for me this year.
If you’ve intrigued by the title of this post, it’s probably because you are feeling some of the same feelings as I do right now. The good thing is that you recognize that you need to take action. Where you could go wrong is if you don’t – that’s where many of us fail when we try to get out of debt. We have the best intentions but we don’t make the right moves – or don’t do it with enough urgency – to make a major difference.
As I normally do when I’m curious about where to start, I did some research. I found that there were a number of steps that I could take that could help me get started on getting myself out of debt.
Here’s a guide to help you get out of debt with some steps you can start using right now:
Step 1: Make a list & check it twice
No, I’m not talking about Christmas here. This is a list of all your debts, their balances and interest rates. This action wasn’t a major surprise to me as I’ve done this before. However, I didn’t want to let the simplicity of it get the best of me. I took a sheet of paper, opened up my budgeting spreadsheet and set up a new tab. Since I do most of my banking online, I went to all the financial websites I have credit cards, loans or bank accounts with and included them. I coped down all balances with their respective APRs (interest rate) exactly as they appeared. It’s also very beneficial to know what your minimum payments are for every account. After tracking down all of my debts, everything was in one place so I could have a bit of a reality check. I guess I’ve tackled the first part of this now – denial.
Step 2: Set goals
I’ve learned all too well that I need to become more goal-oriented when it comes to my finances. Goals allow all of us to break really hard things into manageable chunks that we can feel good about after we complete them.
When you set a goal to pay off your debt you first assess how much money you can contribute toward debt repayment every month. Then you can do a rough estimate of how long it will take you to get out of debt. (Debt / Monthly repayment = Amount of months until you’re debt free). Just understand it could take longer than this to repay your debt but I felt a bit happier understanding roughly how much longer you have to bare this burden.
Step 3: Start paying – highest to lowest APR
Many people think that the first debt they should pay off is the one with the lowest balance. Sounds good since it is easier to pay and then we can breathe a huge sigh of relief when we’ve cleared the debt. However, thinking of this logically – it’s obvious that we should pay off the loan that has the highest interest rate. This way we can save ourselves money on the amount we’ve borrowed. Make the minimum payment possible for every account, besides the one that you’re trying to eliminate first. This allows you to focus on it, and to lose the least to interest.
Step 4: Don’t replace one debt with another
Many people think that once they pay off a debt then they can just take on more debt for something else. I must admit that I’m guilty of this. In North America, we are a society of consumers – meaning we love to buy stuff. Remember to always look back to your goals and reinforce the attitude that your ultimate goal is to be debt-free. If you feel that you need some support, try contributing to a financial forum or join an online debt management support group.
Step 5: Find extra sources of income to pay off your debts
I realized quite quickly that I needed some extra cash to start clearing my debts. I have a full-time job but the money that I earn from that is accounted for. I had to start being a bit more creative. First of all, my husband and I look at some of our high-ticket items. Our mortgage was the largest portion of our expenses. Since we don’t want to move and have a modest sized house already this had to stay. The next items on the list were our two cars. One we rarely ever used since I typically took the bus to work. We got the second car when our kids were quite young as it was a tight squeeze for all of us in the one car. However, now that our kids are grown, it’s not really an issue. A lot of the time we take public transit too so my husband and I looked at each other and thought that selling one of our cars may be a good way to save to pay off our debt. Once we had that idea, we started to think of a lot of other things we could sell that were just sitting around. Sites like Kijiji and Craiglist are free and easy platforms to sell items for cash. Hopefully some of this extra money will help us clear a bit more off our debt load.
Additionally, I started to think about other ways to make money. Working full-time and being a mother, I didn’t really have that much spare time. However, I’ve taken photographs for years and really enjoy it. I have been told by a lot of people that I’m great and that I should do this on the side. I thought that it may be an idea to make some extra money. Nowadays it’s easier than ever to do a job on the side – whether it’s freelancing for a job you do during your day job or making money from a hobby you love, there are lots of ways to earn a bit of extra cash – or at least try. If you don’t want to do extra work all of the time, I thought about going for some seasonal work either during the holidays or for our annual summer fair. Sure, it’s not going to pay that much but it will give me a bit of extra cash I wasn’t expecting which could be useful for paying off our debts.
Step 6: Celebrate milestones
It’s important while you take on more work or cut back that you reward yourself. The problem with a number of people who are paying off debts is that they live in misery until the debt is paid off. The issue with this is that once you’re debt-free and can then spend money again, you could go off the rails. Just like getting in shape or watching what you eat, moderation is the key to success. If you’re in the process of achieving your goals, no matter how big or small they are, that should be celebrated. Don’t take this to mean that you should go out and spend hundreds of dollars at the mall for paying off $100 of your debt. Instead, buy yourself a cup of coffee.
Step 7: Develop long-term positive habits with money
When you accomplish some positive outcomes from your efforts, take note of them on paper so you can cherish this moment. This will help you to develop long-term habits that are positive. You want to ensure that you are able to build a better relationship with debt and your money over the long-term.
I’m finding that these 7 steps are really helpful in getting to the heart of how I can get myself out of debt.
Do you have any other tips you can share for getting out of debt? Let us know…