When you are in a debt trap, getting out of it will be a life-changer. You need to make some important commitments to come out of the debt. In this article, we focus on how to get out of debt and what things you should know before you want to get out of debt.
Paying off your loans or credit card debt is a simple step but there are many things associated with it.
You need to make some right decisions and stick to them. If you don’t stick to it, you have to pay a huge price for your mistake. Here is a list of things that you should know before you want to come out of debt.
1. Review your spending habits
Doing Shopping at the mall, eating in a fancy restaurant and driving home back is comfortable but it becomes a costly deal. When you shop at a local center and cook food at your home to eat then you can reduce a lot of your expenses.
Look back at your monthly expenses, write down your list of highest expenses to the lowest expense amount. Cut down your expenses by having breakfast and coffee at home, carry your lunch instead of spending for it at the office cafeteria, call your friends at home watch movies and party instead of going out. If you change your spending habits you can save extra amount in your pockets to pay for your debts. It is all about making better choices with what you have in your hand.
2. Do not try to dig alone your debt
If you are trying to come out of debt alone, it is difficult for you. Take the help of your friends or relatives, if this option is exhausted then you can contact non-profit credit counseling agencies.
You will get free assistance from the experts to overcome your debt. The experts are trained in debt management, debt consolidation, and counseling advice. The experts’ advice will guide you in creating budgets and provide solutions to come out of debt.
3. Understanding the debt relief program
There is no quick solution to debt problems. If someone promises you to do so then beware. Generally, debt relief programs are three to five years long. Having patience is the key to a debt relief program. Credit unions are one of the reliable sources that are recommended for debt relief programs.
4. Create a practical budget
It is not impossible to control your finances. The first step to control your finances is to prepare a budget. A budget that is practical and realistic will provide all measures for you to cover expenses on food, clothing, shelter, health care, education, insurance and payment of debts. In fact some experts suggest that first allocate your income for your debts and the rest will follow.
Use cash instead of credit card payment. The reason is when you pay with a credit card you tend to spend more as you have one month to repay. If you pay in cash you tend to spend less. Prepare a budget and allocate liquid cash for your expenses from your budget towards your operating expenses or day to day expenses. If you follow the process of preparing a monthly budget and start paying with cash you will definitely reduce excess spending.
5. Consolidate your debt
Debt consolidation is a good option as you consolidate your different debts and pay one debt each month. When you are paying different loans with different bank interest, debt consolidation will save a lot of money as you can avoid paying different interest rates.
Click here for more on the debt consolidation
6. Plan your debt payments
If a person has multiple debts like credit cards, mortgage loan and other debts. Plan your debt payment and look into those debts which are high rate interest.
Select high-interest rate debt and payout on priority, this will help you to avoid paying high interest in the future and it will also reduce your burden. After you paid off your high-interest debt then go to the next high-interest debt and step by step you can reduce your debt burden.
Click here to know about paying off a credit card
7. Do not close your accounts
Credit score system depends not only on how much amount you owe but it also depends on how much credit is available to you. Having credit available and not using can improve your credit score. The best thing is pay off your credit but do not close your account
8. Contribute to your retirement account
If your monthly income is completely towards payment of your debts then it will have a costly effect in the long run. Accommodate a certain percentage either 5 percent or ten percent of your income towards a retirement savings account. The earlier you start contributing towards your retirement savings account the better it is for your secured future.
9. Do not ignore emergency fund
Situations like loss of job, accidents, medical emergencies may come up at any time. Think once and answer ‘are you well prepared?’ for any emergencies in life. If yes, then you are in a good position. If your answer is no then you have to allocate funds from your monthly budget. Once you have paid off a huge debt amount from your savings account, you may not have access to money to meet any emergencies.
Click here to know more about the Importance of emergency funds
10. Verify your credit reports
Check your debt payment performance by looking at your credit report. Verify the credit report and report the discrepancies if you find anything in that report. If any misinformation is reported in your credit report then have it corrected. Misinformation on your credit report will take away your ability to make new purchases and increase your credit.
Conclusion
In the process of getting out of debt, the biggest factor is your monthly income and how well you plan to spend your expenses. Changing your spending habits, prioritising your debts, planning for emergency fund, retirement fund and others are necessary but how well you manage all these is your task to come out of debt.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
