One of the best things you can do for yourself is to be debt free. Along with feeling greater freedom without a constant financial burden hanging over your head, you also have the freedom to buy certain things that you have always wanted. Getting out of debt isn’t always easy, but it will be even harder if you make the following mistakes.
Pay off the debt with the highest interest rate first
If you want to get out of debt fast, you need to put your money where it will reduce your debt the fastest. Paying off your biggest debt first may not be the best way to reduce your debt quickly. Instead, put extra money on the debt with the highest interest rate. Low-interest debt, such as your mortgage, is considered “safe” debt.
Credit cards often have notoriously high interest rates. This is where your interest is likely growing the fastest, and paying it off – or at least reducing it quickly – will slow down the interest you owe each month. If you only pay the minimum balance due, a financial advisor Suze Orman says you could easily end up paying up to four times as much for your purchases.
Eliminate Payday Loans Quickly
One type of debt you want to avoid altogether or pay off as quickly as possible is a payday loan, if you have one. Interest on a payday loan is ridiculously high – perhaps as high as 400% – and worse if you miss a payment.
Payday loans can make you dependent, especially if you don’t have good spending habits. Learning to control your spending can help you break your addiction to not having enough money each month.
Budgeting can reveal where your money goes each month and what you have left to spend in each category. After spending money in a particular category, such as food, entertainment, gas, etc., do not take money from other categories unless absolutely necessary.
Focus on eliminating debt first
Instead of trying to pay extra on all your debts, Fool.com advises focus on spending more money on one debt at a time. Of course, you still have to pay the minimum on all your bills. After paying off a debt, you have more money to spend on the next bill. You will be encouraged when each bill is paid, which will allow you to continue and reduce all your debts.
Continue to spend the same way
Unless you change the way you spend your money, you will remain in debt. Setting a budget will help, but if you don’t stick to it, you will never be debt free. Once a credit card is paid, don’t charge it anything else. Pay cash only until your debt is under control.
Not taking advantage of debt consolidation options
If you have several debts to repay and some of them have a high interest rate, you have two options:
- A balance transfer credit card
If your credit score is still in good shape and you don’t have a lot of debt, getting a new balance transfer credit card could help. These credit cards can be the best way to get rid of credit card debt because they allow you to transfer other credit card debt to the new card and will give you 12 to 18 months without charging interest. .
Although it does not eliminate debt, the advantage is that you can reduce your debt faster during the interest-free period, and it also allows you to make one payment per month. You won’t pay any interest during the introductory offer period, but you need to make sure you don’t miss any payments during this period or your interest rate could reach 29% or more.
- A debt consolidation loan
You can also take out a personal loan to help reduce your debt. Rocket Loans says that all your debts can be paid off with this type of loan and allows you to make one monthly payment. It can be very advantageous for you if you can get a loan with a lower interest rate than the interest rate on your current debt. Do not place any debt with lower interest rate under this loan.
Do not reduce additional expenses
You can get out of debt faster by knowing where your money is going each month. Eliminate unnecessary expenses and adopt a minimalist budget. Save some cash for a few simple pleasures (your kids will appreciate it, too), because making it too tight will make you want to ditch the strict budget before long.
Not increasing your income
If you can get a side job or increase your income in some way, Forbes says it can help you get out of debt quickly. Even a temporary job will help you reduce your debt faster. At the same time, be sure to create a budget and stick to it so that the extra money is used to reduce your debt rather than to buy new things. Bringing in a little more money each month can also help you avoid getting into debt later on.
Not having an emergency fund
Although an emergency fund won’t help you pay off your debt, it can keep you out of debt when an immediate need for cash increases. Setting aside enough money for at least three to six months of expenses allows you to deal with many emergencies without having to take on more debt. Without this fund, says Fool.com, you could be setting yourself up to stay in debt in a cycle that never ends.
Knowing how to get out of debt and doing it are two different things. You can do this if you give it some thought and think about how being debt free would allow you to do more desirable things with your money. Following the recommended steps above will help you on your way to a debt-free life.
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