Myth: Only the Rich can be Debt Free.
Truth: Anyone can become Debt Free. True Debt reduction is plain common sense and hard work.
There is a big difference between Good Debt & Bad Debt. Good debt refers to debt for investment purposes where the interest is tax deductible as the purpose of the debt was to acquire the asset that is expected to appreciate.
This article is in relation to Bad Debt, where the interest is not tax deductible. Bad Debt can feel like a lead weight that hangs around your neck.
Generally credit card debt, car payments, mortgage, and student loans make up the majority of outstanding debt that most people struggle with. Learning to confront your loans head-on and form a strategy for paying them down can help you start managing them.
At Mortgage Excellence, we advise to get out from under your loans and get back in the world, then learn to stay debt free.
This can be achieved by;
1. Assessing your problems.
If you are in debt, don't just bury your head in the sand and give up. You should instead figure out how much money you owe so you can form a plan for getting out of the hole and getting on with your life. Get realistic, get a number on the table and face it.
2. Prioritize your highest interest debts.
Once you've got the raw data, it's important to look for loans that have the highest interest rate.
Part of the reason debt is so hard to get out of is that it gets bigger over time. If you don't pay it down quickly, you end up paying a lot more in the long term, making it very difficult to get out from underneath.
3. Come up with a plan for paying down your debts.
Review your finances thoroughly, crunch the numbers, and see which method of making payments will be the most effective for your situation. Work on paying down the debt with the highest interest rate first, while making minimal payments on everything else. This is sometimes called "laddering" your debt, and helps the borrower feel more actively in control of the debt.
If the interest rates are similar for your debts, pay off the one with the lowest balance first. This is sometimes called "reverse laddering," which allows you see your progress faster, and will make you feel good after each smaller debt is paid off.
4. Talk to a financial advisor about consolidating your debts.
You don't have to go about this alone. Loan paperwork is notoriously complex; it's frustrating to try to go through it solo. At Mortgage Excellence, we can assist you about consolidating the loans into a more manageable single payment each month, making it easier to pay down your debt.
It may also be possible to get the interest rate lowered on certain loans, or to establish a deferral for a short period of time. In some situations, you may be able to defer the payment for a certain length of time, during which you won't accrue interest. During this time, you can aggressively pay down the loan while the debt is not getting any bigger - a serious advantage.
1. Create a strict budget.
Doing the math necessary to live within your means isn't as complicated as it might seem.
Here goes: Add up what you make every month, then add up your necessary expenses every month. Your necessary expenses include food, rent or mortgage payments, bills, and minimal payments on all loans/debts. Include everything.
It will be easier to keep an ongoing and adjustable record on a spreadsheet. Follow the hyperlink to download a Starters Budget Spreadsheet to get you started.
2. Cut costs wherever you can:
Learning to cut unnecessary costs down as much as possible and stretch every dollar will help you devote more money toward paying down your loans and getting out from under debt as quickly as possible. At Mortgage Excellence we advise the following:
Cook dollar-saving meals.
Cut non-essential entertainment expenses
3. Pay extra on your debts whenever you can.
Have you a little extra income this week? You could blow it all on a night out, or you could put it toward your loans.
4. Save anything you don't spend.
If you've budgeted appropriately and have some money left over at the end of the month, save it.
5. If you're entitled to a tax refund, spend it wisely.
For many people, tax season is something to dread. For some, it's actually an opportunity to get back a little money in the form of a tax refund
1. Commit to a change in behavior:
If you want to stay debt free, you'll need to freeze all of your non-essential spending and avoid buying things that you can't afford. If you can't pay for something in cash, today, you don't need it. Commit to the process and the journey of remaining free of debt and enjoy the freedom that it brings.
2. Stick to your Budget:
Earlier you recorded your income and expenses. Now continue to refer to this budget and make appropriate adjustments on a regular basis.
3. Keep Saving:
Every time you are paid, put aside some money for bills, food, and other needed necessities of living, and some money aside to save. This can be easier to manage by using several bank accounts.
4. Be happy living within your means:
For many people, debt happens because we think we deserve a certain quality of life. Why don't we deserve the expensive cars, the fine jewelry, and the fancy vacations that other people can afford? This kind of thinking is how people get sunk into heavy debts they struggle their whole life to pay off.
Learn to be happy living within your means, and take pleasure in every dollar you save. Be free.
5. Stay Healthy
Medical debts quickly sink financially secure people into financial trouble. You need to eat well, exercise, and maintain proper dental health to avoid costly and unexpected expenses that come as the result of health scares. A single trip to the hospital can bankrupt people who aren't prepared for it. Don't be one of them.
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