Many Britons today have large amounts of bad debt (credit card debt). This bad debt can bring many stresses to life and bring instability to your financial future. With the wealth of debt advice available on the internet, it could be daunting to know where to start and what advice to follow. This article has aimed to gather information on getting out of debt for various sources and it is listed below in a 5 step process.
1) Give Yourself a Goal and a Deadline
The first thing you need to do if you are serious about getting rid of debt is to make a plan. You need to look at the numbers and decide how to tackle the situation. Make a concrete goal and stick to it. The goal could be to “pay off my entire credit card debt”. Once you set a goal, set a time-limit for achieving your goal.
If your debt is excessive and setting a goal for large amount is putting you off, try making smaller goals that you can achieve every month.For example, rather than focus on your total balance, focus on paying at least £300 toward your debt every month. As long as you do this, you can consider the month to be a success. With large amounts of debts, the key is to mix both large and small goals and this could prove crucial in paying your debt off.
2) Understand Your Interest Rates (and Attack the Highest One First)
Even though many people have credit cards and/or loans, the majority of us don’t understand how the interest rates on these financial instruments work. Whether your debt consists of student loans, car loans, credit cards or all of the above, it is always a good idea to take some time to read the fine print on your statements so you understand exactly what you’re paying each month and why.
To get rid of debt effectively, identify the account with the highest interest rate and concentrate on paying this off first. For example, if you dedicate £300 per month toward all your debt, first make sure you can pay all your minimum payments and then use whatever is left to increase your payment to whichever one has the highest interest rate.
3) Track Your Spending
This step is crucial in paying off your debt. You need to track your spending to see how money is ‘leaking out’ of your bank account every month. This will help you analyse what exactly it is you are spending your money on and it will give you a clearer picture on what you need to do in order to save money on a monthly basis. Tracking your spending will help you reduce your debt in 2 ways, firstly it will stop you from purchasing impulse buys thus you are not racking up more debt and secondly the monthly savings you make can be used to pay off your existing debt.
There is a good app called Toshl Finance I use to help me track my spending and budget and you can see my review of it here.
4) Be Realistic With Your Goals and Yourself
One big way in which many people unknowingly sabotage their own debt-free goals is by expecting themselves to accomplish difficult outcomes in a short time frame. Setting unrealistic goals for yourself will lead you to always falling short – and this will make you disappointed.
Having a feeling of disappointment inhibits your progress because human nature relies on hope and optimism in order to be productive. Your journey will be twice as long and twice the effort if you are feeling disappointed about your progress. So when creating goals, make sure they are realistic. If you think you might be able to pay £600 toward your debt on a good month, then make your goal £400 and try to overshoot it every month. You’ll feel way more excited and way more motivated about going above and beyond your goal than if you were barely reaching (or not reaching) it.
With the above being said, it does not mean that you should make your goals super easy. Goals should be challenging but reachable. And remember, you can always adjust your smaller goals to reach the larger goals as discussed in point 1 above.
5) Work the System
To eliminate debt smarty, you need to take advantage of balance transfer opportunities to secure lower interest rates especially in this current period where rates have hit rock bottom.
Balance transfers allow you to move your balance from one credit card to another for an introductory period of reduced or no interest while you hack away at the balance. Before doing any transfer, always call your existing bank first as they might entice you stay with a lower rate. If they don’t offer you a good rate, look around for the best opportunities. This can quickly be done online and look for cards with no (or very low) annual fees and the best interest rate. Once you choose one, set a calendar reminder to renegotiate after the introductory period or transfer again elsewhere.
Using the above 5 strategies will hopefully give you the motivation and the start point to the process of becoming debt free. Remember, the journey to being debt free is not the easiest and has obstacles and you need to continuously be diligent with your finances but once you get there, trust me, it’s worth it!