- Consciously change your relationship with money to get out--and stay out--of debt.wallet and credit cards image by CraterValley Photo from Fotolia.com
Although it would be nice to rid yourself of debt quickly, this is typically not feasible or even realistic, as it likely took years to pile up. It takes dedication, commitment and intentional decisions to get out of debt. Start small and take baby steps to chip away at your debt until you are comfortable and completely debt-free. - Gather each one of your bills including personal loans, student loans and any other miscellaneous debts you may have. Make a list of each debtor, the amount owed, the minimum monthly payment and the interest rate. Seeing just how much you owe will likely be unpleasant. It is imperative that you are honest with yourself about your debts and situation before you can begin to make a conscious choice to get out of debt.
- Create a list of all of your income, expenses and debts. Compare your income with your expenses to see what changes need to be made in order to create a gap between those numbers. Allow yourself a certain amount of cash each pay period for lunch, gas, groceries, entertainment and other non-essential expenses. Keep track of where your money goes to help you make smarter money choices. You'll likely surprise yourself by seeing exactly where a large chunk of your money goes.
- Continue paying your minimum monthly payments--and more if you can--while you build up an emergency fund. Your emergency fund should ideally have a minimum of $500, which would cover quite a few emergencies such as needing a new tire, brakes or doctor's visit. Gradually increase the amount in your emergency fund until it equals--or exceeds--three to six months of expenses.
- Go over your expenses to see where you can realistically make cuts. Take your lunch to work one extra day every week. Walk to the park on the weekends with your family instead of going to the movies. Carpool to work. Cut out anything extra that you can. It may be uncomfortable for a while, but being debt-free will give you a freedom that none of those things will. Avoid charging anything, unless it is seriously a dire emergency. Take on a second job, overtime or sell your own services, such as walking dogs, housecleaning or babysitting, if possible.
- Prioritize your list according to the type of debt, then the amount or interest rate. Start by paying off any pay day loans, pawnshop loans or other high-interest loans. Make the minimum payments on your other debts until those are paid off. Then apply that "extra" money to the next debt on your list, which will largely depend on you and your particular situation.
Dave Ramsey recommends using a "snowball" approach, in which you pay off your smallest debts first so that you have the personal satisfaction of seeing your debts paid off. The money that was going to that debt should then be coupled with the minimum payment to pay off the next smallest debt, and so on.
Another method, the "avalanche" approach, is to pay off the debts that carry the highest interest rates first. If instant gratification isn't an issue for you, use a debt calculator to determine which method will save you the most money and allow you to pay off your debts sooner. - Use any extra money you receive, such as overtime or bonus checks, and any money you save, such as from dining in rather than out once a week, to pay off your debts. Saving money won't be as high on your list during this time, but make it a habit to save at least $10 per week so it's easier to save larger chunks when your debts are paid off. Stay true to your budget and your plan to be debt-free. Lying to yourself isn't going to make the debt disappear. Close your credit card accounts or put the cards away so you aren't tempted to charge again. Keep one credit card for emergencies, even when you're debt-free; but avoid using it unless it's an emergency or you can pay it off in full at the end of the month.
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