From credit cards to personal loans to mortgages to student loan debt, the average American has $90,460 in debt according to Experian’s 2019 Consumer Debt Study. Here’s another shocking stat: about 80 percent of Americans have one debt or the other.
The financial burden of debt can sometimes get unbearable, especially when it keeps piling up. While many people want to get rid of debt, all their efforts have the opposite effect. That’s why we’re going to explore tried-and-true methods that have helped countless people on the verge of bankruptcy to financial independence.
- Face Your Fears: How much do you owe?
It’s surprising how many people don’t know how much they owe because they’re afraid of how large it is. All they care about is making this month’s minimum payment, bask in the temporary relief, and repeat the cycle the next month. Unfortunately, this is a recipe for disaster. Confront your fears and place a number on your total debt.
While your total debt is important, what’s more important is your debt-to-income ratio. Your DTI ratio is calculated by dividing your total monthly debt payments (credit cards, loans, mortgages) by your monthly gross income. If your DTI is over 43 percent, you lie in a precarious financial position. But at least, you know you have a problem.
- Avoid Behaviors That Got You In Debt
People get into debt for different reasons – some are reasonable while others are foolish. For instance, taking out a student loan might be done in anticipation of giving yourself a better shot in the professional world, boosting your earning potential. However, spur of the moment purchases – like buying a $1,000 shoe with your credit card when you clearly cannot afford it or taking a luxury vacation when you cannot pay for it – is unwise. Stay clear from such behaviors.
A good strategy to help with that is to create a budget and stick with it! When you create a budget, you exactly how much you have to spend for the month. If you cannot control your buying impulse, you can either lock up your credit cards or, as a principle, never take them out. Another tip is to discipline yourself to make minor purchases with cash! This helps to fight against spending what you do not have.
- Pay More Than The Minimum Payment
Unless you plan to pay your credit card debt for decades, then you have to make more than the minimum payments. When you make only minimum payments, it goes towards clearing the interest – which, by the way, keeps rising as the principal remains.
By paying more than the minimum, you not only get to clear off your debt more quickly, but you also save more in the long run.
When making payments, you have to be strategic. Some financial experts recommend that you make minimum payments on all other debts while focusing on your highest-interest debt. Once you clear that one, you then move on to the next debt with the highest interest.
Another strategy is the debt snowball payment, where you focus on your smallest debt to clear it off, before working your way up. The advantage of this method is that you quickly see some of your debt vanish and this helps to motivate you on paying off the others.
- Earn More Money
There’s only so much money that you can squeeze through tighter budgeting. At one point, you just have to make more if you want to pay off your debt more quickly. That’s why having a side hustle is important if you’re deep in debt. Work multiple jobs if you have to. Try to see if you can get a better-paying day job. Or better still, improve your qualifications so you can be equipped to earn more. Thanks to the internet, there are many opportunities to make more money, either it’s through freelancing, affiliate marketing, or blogging, among many others. Earning $10,000 more in annual income will go a long way in helping to clear off your debt on time.
- Consider Debt Relief Methods
If you’re deep in debt, you might need to reassess your options. Common debt relief methods include:
Debt Settlement: This involves enlisting the help of a debt relief company to negotiate on your behalf so that your creditors will agree to a lower outstanding amount than you have to pay.
Debt Consolidation: This involves combining all your debt into a single loan with a more favorable term. This makes your monthly payments more manageable. This can be achieved by taking out a new loan with more favorable terms to clear off your outstanding debts.
Debt Management: This involves enrolling in a program that offers debt counseling. They will also help you to consolidate your debt and negotiate with creditors.
Bankruptcy: When there’s absolutely no way of paying back your debts, declaring bankruptcy may be the only real shot at a fresh financial start. However, note that bankruptcy only wipes off unsecured debt. You’ll still have to pay secured debts, student debt loans, and alimony.
Debt relief options will impact your credit score negatively. That’s why it’s important to weigh your options with the help of a financial expert so that you make the right choice.
If you’re looking for a magic wand to automatically eliminate your debts, no such wand exists. Working your way out of debt requires sacrifice, determination, perseverance, and patient. But if you stay right on track, you’d be out of your financial woes in no time.
Contact us today for more details.