Did you know there are 5 ways you can get out of debt? Well, you may have been having trouble even finding one. In the last quarter of 2023, consumer debt was reaching up to $17.5 trillion, and yours may be a drop in that ocean. With the right debt management strategies, you can say goodbye to your stack of bills.
Financial freedom is within your reach. All it takes is a few steps to achieve your goal of becoming debt-free.
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How To Get Out Of Debt
The way out of it involves a few steps: setting your goals, writing a budget plan, changing your money habits, altering your debt-to-income ratio, and deploying payment strategies like debt relief or debt management programs.
Keep in mind that these may work differently, according to your situation.
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Set Your Goals
The first step of debt management is knowing why you want to get out of debt.
It may sound ridiculous as nobody wants to be riddled with so many pending payments. After all, being bombarded with balances from auto loans, home equity loans, credit cards, and student loans can be quite daunting.
However, you should go beyond your current discomfort and look at what your end goal is for paying your debts off.
Simply put, what do you want to do after settling your balances? What do your payments block you from having? Is it that vacation in Europe you’ve always dreamed of? How about having enough to pay for your kids’ tuition?
These goals can further motivate you to pay them off. You may want to write these down on the written budget we will teach you. Look to these goals atop your mountain of debt, and you will rise on top!
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Write a Budget Plan
After writing why you want to become debt-free, the next step is writing a budget.
Start by listing your unpaid balances, from the largest to the smallest. Then, list all your monthly expenses such as utility bills. Determine how much you should allocate to your monthly payments to remain current on your balances.
Next, write down how much income you earn, and deduct your expenses to it. The remaining amount should be the money you can settle your payments with.
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Change How You Spend
Now that you know what you need to do to pay off your pending balances, you should now avoid negative spending habits.
Think about why you needed debt management in the first place. Of course, there are times that you need to shoulder a huge expense due to an emergency medical procedure or a natural disaster, so we aren’t talking about those caused by them.
However, your poor spending habits could have made debt management necessary, and now you can’t get out of debt.
You may have wanted to “keep up with the Joneses” or keep out FOMO (fear of missing out) by paying for a brand-new Chevy or a pair of Yeezys. You wanted to show off or feel cool, and you thought expensive stuff could help.
However, it’s better to instead live below your means. Doing so helps you have money left over for personal loan payments. It’s also more sustainable, as spending frugally keeps you from borrowing money in the first place. While it may be uncomfortable to find people having better stuff, remember that freedom from debt is much more important.
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Modify Your Debt-Income Ratio
You should also change the amount of your borrowed money and your income. That ratio between them is at least under 30% because it is a good indication that you have a manageable amount of unsettled payments. Add up all your monthly payments and divide them by your monthly income to get the debt-income ratio.
To get out of debt, you need to reduce them, boost your income, or both. This is the more hands-on step of debt management as you do more than just create plans. Of course, the obvious way to do so is to reduce them. You may use the debt snowball method of taking down smaller ones or the debt avalanche which aims at larger ones first.
Alternatively, you may boost your income, so you have more to pay your settle your balances. If you have extra time, you may get a second job for more income. You may even start your own business online on sites like Etsy, using your other skills to earn more.
There are also various remote work opportunities you can apply for, so you can earn extra at home. In fact, you may sell unused knick-knacks at a garage sale or in Amazon, so you can turn your clutter into money!
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Debt Payment Strategies
If you’re wondering how you can start tackling your pile of unsettled balances, take note of the debt snowball and the debt avalanche methods. The first involves paying off your smallest ones first.
This method may take longer since you start small while the other unpaid amounts grow as they accumulate interest. However, these small victories may feel good, motivating you further into your debt management plan.
A faster alternative is the debt avalanche method where you start with the larger amounts first. This may not be the choice for those who get easily discouraged since larger ones take longer to pay off. However, this prevents them from growing larger due to interest, so you can start paying the smaller ones easier.
Whichever debt management technique you choose will depend on your preferences and your personality. Nevertheless, both will require discipline in your spending habits and diligence in paying back borrowed money. Your actions will determine how and when you get out of debt.
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How To Get Out Of Credit Card Debt
In the third quarter of 2019, the United States amassed over $1.08 trillion worth of credit card debts, and yours may be somewhere in that pile. While the credit card has been a staple for millions of Americans, it has also become the source of much distress caused by unpaid balances.
We spend more when using credit cards as we don’t feel as much regret compared to payments using cash. However, credit cards can also drag you down in deep financial straits in a few easy swipes.
As you buy more stuff with credit cards, they accumulate interest, burying you in payments. You may even get overwhelmed by the sheer amount of your unpaid balances and overflow your credit history.
Luckily, you may perform either of these three options: debt consolidation, debt settlement, and debt management. We’ve listed five steps per option that may hopefully get you out of your money slump.
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Debt Consolidation
It is when you borrow a huge loan to pay several unsecured loans all at once.
Consolidation helps you pay off the sum of your credit card balances at lower interest.
It usually involves paying an online loan company, a credit union, or a bank within 2-5 years. Here’s how you can get a debt consolidation loan:
- Determine if you should get a debt consolidation loan. The loan lets you have a lower interest rate and still use credit cards. Unfortunately, you may only include balances from unsecured loans, and a bad credit rating may bar you from borrowing one.
- List your unsettled payments. Find out which ones you can include in the loan aside from those from credit cards.
- Compare your loan options. Choose the best in debt management that can help you get out of debt.
- Apply. Prepare the necessary documents such as your credit reports and proof of income.
- Pay it off.
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Debt Settlement
A settlement is when you ask a company to negotiate with your lender to forgive some of your debt. This reduces how much you owe, so you can complete a smaller lump sum payment. Here’s how you can start to negotiate a settlement:
- Determine if debt settlement is right for you. It can help you pay your unpaid balances faster, boosting your credit rating in the long run. However, this causes a short-term drop to your rating and some creditors do not accept debt settlement.
- List your debts and payments. Remember that settlements only work for unsecured loans.
- Choose the best company. Make sure to work with a reputable institution as some may be fraudulent operations.
- Prepare the full amount. As your chosen debt settlement company discusses with your creditors, save money for the payment.
- Pay it off. Accept the resulting settlement offer and pay the required amount to get out of debt.
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Debt Management Plan
Management plans involve paying your unpaid balances through another company with lower interest rates. It doesn’t involve taking out another loan, unlike consolidation. It guides you with counseling sessions, so you will have someone to help you.
Here’s how you can start your debt management plan:
- Find out if DMP’s fits your current situation. If you want to keep using your credit cards, DMP’s may not be the best option. They usually let you use just one for emergencies. This option doesn’t factor your credit score though, so it’s great for those with bad ratings.
- List your unpaid balances. Provide all these to your company’s financial advisor, so they can create the best plan for you.
- Choose the best company. Find the ones with a proven record of helping with managing your unpaid balances.
- Pay on time.
- Follow your debt management company’s advice. Learn from them how you can avoid borrowing too much money.
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Summary
There are many ways to get out of debt such as settlement, consolidation loans, and debt management plans. Nevertheless, paying your creditors on time is always a priority.
More importantly, the best way to good financial health is by living within your means. Refrain from borrowing money for expensive items, buy cheaper alternatives, and save money for emergencies.
Frequently Asked Questions
Can a budget help me get out of debt?
Yes, creating a detailed budget can help you manage your finances better, identify unnecessary expenses, and allocate more funds toward paying off debt.
Can making biweekly payments help reduce debt faster?
Making biweekly payments instead of monthly can result in one extra full payment a year, reducing your balance and interest faster.
How do I prioritize debts if I have limited funds?
Prioritize secured debts like mortgage and auto loans to avoid foreclosure or repossession, then high-interest unsecured debts like credit cards.
Yes, creating a detailed budget can help you manage your finances better, identify unnecessary expenses, and allocate more funds toward paying off debt.
Making biweekly payments instead of monthly can result in one extra full payment a year, reducing your balance and interest faster.
Prioritize secured debts like mortgage and auto loans to avoid foreclosure or repossession, then high-interest unsecured debts like credit cards.
