Bouncing back after being in debt can be a painstakingly long process. But it doesn’t have to be. By taking time to assess your finances and properly budget can make paying of your debt easier and substantially faster.
By following through these 5 easy steps you can get the wheels turning on your debt crushing machine.
- Make a List of All Your Debts
If this is the first time you have tried to gather all your debts you may have a bit of work ahead of you. Make this process easier by getting a copy of your credit report. You can receive one free copy yearly from several websites.
Your credit report will list all of your debts- current past and closed accounts. When you get this report you can see every debt reported to the credit bureau. These have a large effect on your credit score so removing them will also help raise your credit score.
Be sure to reach out to each collection company on the credit report to be that the debt is able to be proven. If they can not prove your debt, it may be able to have it removed from your report. If the debts are verifiable, you may be able to set up a payment plan for these debts.
It is important to look into the details of every debt to ensure your are actually helping your financial situation.
- Sort Out Your Finances
Now that you have a list of all your outstanding debts, you need to also gather information on your finances. First, determine your yearly and monthly income. This can be done by obtaining copies of paychecks and time cards from newer jobs or tax forms from previous years for long-term jobs.
When calculating your annual income be sure to calculate the post tax income in order to receive the most accurate amount that you bring in. Otherwise, you risk over budgeting and not being able to cover your expenses as a result.
While gathering your annual income information you can begin keeping track of your current spending habits. You can do this manually by writing down each time you spend money. An easier method would be to primarily use your debit card and then review a copy of your bank activity. Some banks even categorize your spending in charts to help you understand where your money is going.
Once you have a breakdown of your monthly expenses you can see where you are overspending, and even recognize things you’re paying for but may not be using. There are most likely several instances where you could be saving money- or putting it towards your debts.
Getting a good picture of your finances is important regardless of if you are trying to get out of debt or not. Understanding where you stand can help you live at or below your means leading to less debt and more savings.
- Set Up A Realistic Payoff Plan
Now that you have a list of who and what you owe, as well as a breakdown of your finances, you are ready to begin constructing your plan.
By using a debt payoff planner you can make this process much easier. There are several planners and apps available to help you set up a timeline for when you can have your debt paid off. They break down your debt into comprehensive charts that easily explain your interest and estimated monthly payment.
When you compare how much debt you have with how much you can afford to pay monthly, becoming debt free may seem far away. It is not uncommon to have a payoff plan stretching over 5 years.
Creating a plan that you can easily manage is a crucial step. Do not rush your pay off plan and remember “slow and steady wins the race”. Following a strict 5 year plan could save you from decades worth of stress and living paycheck to paycheck.
- Build a Savings Account While Paying Off Debts
While creating your debt pay off plan, it is important to allow money to be set aside for savings. Putting all of your extra money towards removing your debt may seem like a great idea. However, if an accident or other unexpected cost arises you will have no way to handle it.
Saving money requires discipline and hard work just like the rest of your debt payoff plan. Many financial experts even stress how important it is to have a second or even third source of income.
You do not need to take on a second job to obtain a second stream of revenue. You could find something that fits into your life and make it profitable. Have a garden? Sell your extra crops by the roadside. Like to crochet? Make an etsy to sell your creations.
The income from you “hobby” can put money directly into your savings. This avoids you having to find even more ways to reduce spending.
- Stick to the Plan
Execution of your plan will make or break you on your journey to debt freedom. By staying consistent in your monthly payments and savings you can reach this goal that so many people work towards.
The best way to remain consistent and dedicated while paying off debt is to find a good source of motivation. The desire to gain financial freedom in order to take the long awaited vacation you’ve always wanted or save up for your child’s college fund should push you to succeed.
Although paying off debt is difficult, especially on a low income, it is manageable with the right preparation and dedication in place. Remember, paying off debt takes time, patience and consistency. Keep those goals in mind and don’t stray from your plan.
If you have any experience paying off large amounts of debt, how did you manage your budget while doing so? If you have any helpful advice, leave a comment and share your experience in the section below.