Learning how to get out of debt is the first important step toward repairing your finances. There are several strategies that you can employ to fix your personal finances, and if you’re struggling to meet your expenses and make progress on debt payments, you should know what’s out there.
High debt burdens can get in the way of your financial progress. It can prevent you from saving for a bigger goal like retirement or buying a home, and it can keep you from taking out more beneficial loans, like a mortgage or small business loan, that help you build up your wealth.
To get back on track toward your bigger financial goals, you need to know how to get out of debt. These are some of the most effective and popular strategies.
#1 Debt Consolidation
You’ve likely heard of a debt consolidation loan, where you borrow money from a bank or credit union at a low interest rate to pay off all your high-interest balances with credit card companies and other lenders. However, you don’t need a debt consolidation loan to get out of debt.
You can also start a Debt Consolidation Program. Certified Credit Counsellors from a non-profit credit counselling agency can provide professional advice on debt consolidation that doesn’t involve taking out a new loan. A DCP reduces or eliminates the interest rates you pay on your individual debts and simplifies your finances so you only have to make one monthly payment.
Insolvency measures such as bankruptcy are typically a last resort. The consequences of declaring bankruptcy can be long-lasting and set you back financially, especially if you have assets like considerable equity in your home, secondary properties, investments, fine art, multiple vehicles, etc.
In bankruptcy, many of your assets may be liquidated to pay your creditors, while surplus income can also be collected for a period of time. It will also remain on your credit history for years. It should be approached with caution.
#3 Snowball and Avalanche Methods
If you’ve got the financial resources to pay back debts yourself, try using either the snowball or avalanche methods. These are two different approaches to the same idea: while you keep up with minimum payments on all accounts, you pay as much as possible to knock out one single debt.
In the snowball method, you focus your payments on the smallest debt you owe. It will be the quickest to pay back, and the momentum can help mentally motivate you to push through the rest.
The avalanche method is purely about cost. It focuses on the most expensive debt you have, i.e., whichever one hits you with the highest interest charges. This method will help you minimize the cost of servicing debt.
#4 Bare-Bones Budgeting
Limit your spending to a bare-bones budget that slashes all non-essential expenses and even finds ways to reduce essential expenses. All of that extra money can be put toward debt repayments. By living off of a smaller percentage of your income, you can speed up debt repayments.
Make no mistake, this kind of austerity isn’t a lot of fun. But it’s only temporary. The sooner you get out of debt, the sooner you can do what you want with your money.
The way out of debt begins with a smart strategy. Get professional advice when it comes to debt consolidation, budgeting, and other tools.