A majority of Americans have some sort of debt they need to pay off. In most cases, living with debts has become a way of life. From student loans and mortgages to personal loans and credit card debts, more than 50 percent of all people borrow money at some point in their life.
Whether you owe a small amount or a huge sum of money, you need to pay the amount in full at some point. Outstanding balances can be overwhelming, and you might feel that you are drowning in debt and that you can’t get rid of it no matter how hard you try.
The good news is that there are ways to pay off your debt, and at the same time, still afford your lifestyle. While you will need to make some sacrifices, you can still enjoy some things you love doing.
Know Your Financial Status
People who are having a hard time making ends meet each month are in that situation because they don’t know the real status of their finances. Before you can get rid of your debt, you should first know your actual financial status.
The process can take less than an hour of your time. You need to list all your expenses– that includes utility bills, food, childcare, entertainment, car payments, rent or mortgage, and grooming, just to name a few. You should get the total you spend each month. If you don’t know the exact amount you spent in a category, it is better to overestimate. Take the sum of your expenses and subtract it from your income.
Now you know how much money you can spend on other things before paying your financial obligations. Itemizing expenses also allows you to find out areas where you can get some savings.
Create a Budget
Another reason people are suffering from financial problems is the lack of a monthly budget. They hate the word and think they can live life without one. However, the truth is that you need to have a well-thought-out budget to become debt free.
A budget is a guide that helps you achieve your short-term and long-term goals. Some people think a financial plan is too restrictive, but the process allows you to also have some leeway for items that are not part of the budget.
Creating a budget can be overwhelming, especially if it’s your first time making one. You can ask for advice from family and friend, or search online for a template. However, using a template can be frustrating or easy—depending on your situation.
In most cases, though, it is easier to start from scratch. That way, you can create one that best suits your needs. You need to invest some time and effort to make sure your specific budget includes everything you need to spend for the month.
Keep in mind that the budget will be constantly changing over time. You might not even recognize its original form after a couple of months. Its goal is to help you manage your saving as well as spending. Make sure you modify it depending on your finances.
Paying Off Your Debt
List all your previous loans and add up the minimum payments for each month. That way, you know how much you need to set aside from each paycheck. Make sure you list the debts in order, from the lowest to the highest.
Pay the minimum on all the debts, except for the lowest remaining balance. Pay as much as possible on that one. That way you can get rid of one fast. Repaying one completely will motivate you to continue with your long-term goal of getting rid of your financial problems.
Make sure you automate your monthly installments. That way, you don’t need to think about paying them each month. Just make sure that you change your settings when you are done with one loan, and you move to the next one in line.
Once you complete the payment for the first loan, use the money you freed up from the previous loan payment and put it toward paying off the next one. Keep doing this until you got rid of all your monetary obligations.
The best thing about this method is that it is easier to pay off the loans with higher remaining balances because you will have collected all the minimums from the loans with lower balances. Once you get rid of all your obligations, you can use the extra money to fund your retirement and other personal investments.
Avoid Getting More Loans
When you are trying to dig out of the debt trap, you should avoid taking out more loans. While you might feel like you are limiting yourself, opting not to borrow more money is living within your means. One exception might be obtaining a low-interest loan to consolidate your other debts.
It is important that you know the difference between wants and needs. It might be hard at first, but you will enjoy spending less in the end. You get to maintain your lifestyle but one that’s not quite as extravagant as it used to be.
However, you don’t need to starve yourself. You can reward yourself occasionally to motivate yourself to continue with your goal. You should include some cash for shopping or watching a movie. Rewards are important so that you don’t give up on your long-term mission of getting rid of your debt.
Depriving yourself could break you and might make you go on a spending spree. You should come up with prizes that you should reward yourself with when you pay off one loan. The reward would provide you with the motivation to strive for the next one.
You should not let your financial problems paralyze your lifestyle. Start by creating a budget that is a guide on how you spend your money. Make sure you keep it flexible and make changes when needed.
You know your own financial situation, and you should not compare yourself to others. Find the best method that helped you achieve your goals in a short period of time. Just make sure you live comfortably within your means as you try to reduce, and then completely pay off all your financial obligations.