Get-Out-Of-Debt Plan: 4 Steps To Finally Achieving Financial Freedom
Let’s face it: Being a 20-something these days is expensive. If you went to college, there is about a 70 percent chance you had to take out loans to go.
About 23 percent of you also have at least one credit card, and you’re more than likely carrying a balance if you do.
Many people also have debts from medical procedures, auto loans and personal loans.
If you don’t have any debt right now, awesome for you. You can stop reading and go bask in your debtlessness.
For the rest of us managing our debt and trying to get out as quickly as possible, making progress can feel slow and frustrating, especially with interest continually racking up and increasing the balance.
That’s why it’s so important to make a plan to get out of debt and stick to it.
Planning on how you will get out of debt puts you back in control, helps you create structures that guide your earning and spending and gives you the sense of accomplishment of completing things you set out to do. Here’s how to do it:
Gather Your Data
The first step to creating a plan to get out of debt is to take stock of where you are at financially.
The three most important numbers are income, debt and spending. Before creating your plan, you’ll need to pull all these numbers and have them handy.
For income and spending, pull your last month’s bank statement to see how much you earn from your job (after taxes are taken out) and where you spend money.
If you work in a job where pay is variable, such as in sales or in the service industry where you are tipped out, get a couple more months of data so you can get an average of what you’re bringing in.
If you are paid mostly in cash, you might want to start keeping a tally on your phone so you can determine how much you’re actually making.
For debt, pull your loans, their balances, their minimum monthly payments and their interest rates.
Establish Your Budgetary Needs and Priorities
To get out of debt faster, look at your actual spending data and start prioritizing expenses to free up cash to pay debts.
Your essential items are your food, housing, insurance, utilities, household expenses and transportation.
Run those current costs, and see what you have left over. Then, add up all the other expenditures you made to see how much money you are spending on non-essential items. Identify spending that can be cut out.
If you are running out of room in your budget before addressing debt payments, start looking for ways to save in the essential category or increase your income.
You could cut back on all of these categories if need be, or you can make up your needed difference with part-time work through companies like Uber, TaskRabbit, DogVacay or find gigs on sites like UpWork and Craigslist.
It might not be fun in the short-term to move into a smaller or cheaper place, start eating beans and rice four to five times a week or downgrade your car situation, but these three items are usually the largest expenses and the easiest place to make big impacts.
Working extra hours can be stressful, too, but it will help you get out of debt faster, and you need to weigh these priorities in your get-out-of-debt plan.
Once you have your completely essential budget number and your actual spending number, compare the difference between the two to find the amount you could be applying to your debt balances.
Make Your Plan
Now that you know how much you can apply to your debts, start prioritizing them. First, calculate the minimum payment you need to make on each of them.
This is pretty easy, as it’s provided by all of your loan holders. If you have enough to make minimum payments on all of the loans, apply the extra money in your budget to the loans with the highest interest rate first.
If you are not able to make the minimum payments, even after exploring downsizing on some of your essential items, you can take a few steps to get out of debt faster.
The right debt plan for you will help you achieve your financial goals — like saving for a house down payment or traveling — with your everyday lifestyle and comfort.
Student loans: If you have federal student loans, there are many ways to pause paying back student loans. Forbearance and deferment can give you one to three years without making payments.
Remember, you’ll be accumulating interest during these times, but that can help you if you have higher interest debt, like credit cards, that are causing you to struggle.
Applying the money you would have been spending on student loans to other higher interest debt can help you get out debt faster and pay less in total, and debts like credit cards and auto loans almost never have this option.
Also, if you are paying a big monthly payment to student loans, you can apply to tie your student loan payment to your income using one of the government’s student loan programs.
Credit cards: If you have steady employment, you could qualify for a lower interest rate credit card. NerdWallet has a great comparison tool to see if you qualify for a better credit card than you are currently using.
Additionally, you could qualify for a personal refinancing loan through a company like UpStart, which could be at a lower interest rate and help you pay off that debt faster.
Medical debt: Medical debt tends to be one of the more flexible kinds, and you can usually negotiate a payment plan with the provider if you are struggling to pay.
Be sure to communicate all of you plans though, as you never want to let bills lapse into collections if you can help it.
Stick To Your Plan
Seeing how you will make progress over time is motivating and helps you to continue making progress.
If you hit a big milestone, don’t be afraid to have a small reward or bonus to yourself, like going out to a nice dinner once you’ve paid off a big credit card bill.
Rewards like these help create positive reinforcement that will help you feel good about disciplined budgeting and getting out of debt.
Also, it can be very helpful to have an accountability partner who is also trying to get out of debt.
You are much more likely to achieve your goals and stay strong through periods of temptation if you have discussed your plans and goals with a partner.
It’s just like how having a workout buddy makes it so much easier to stay on track because you don’t want to leave your partner hanging or look like a flake.
I hope these tips help you make a getting out of debt plan and stick to it.