The number of people in debt in America is no longer funny. According to Pew Research study, more than half of Americans spend above what they earn each month. Most Americans use a credit card to supplement their earnings.
Digging deeper, an average American has $6,345 in credit card debt and about $24,700 in non-mortgage debt. Therefore, one could see how many Americans feed on hands to mouth.
Student loans, mortgages, personal loans, credit cards, and bills are debts that are sinking an average American, with almost everyone owning approximately $92,727, according to Experian.
The chances are that you are in debt as you read this, and if you don’t take drastic action, the debt will increase. Thus, do not wait till you lose your job, have a serious illness, or need an emergency home repair before you think of cutting off your debts. Therefore, this article will explain the practical ways to get out of debt.
Take a drastic decision
The first action in clearing your debt is to first own up to your decision – face the music. You need to account for all your expenses to know how you spend your monthly income. Get all your loan statements, bills, and other things that contribute to your spending. Check your loan/credit card payments for the essential bills (power, heat, and water).
If the essential bills exceed your monthly income, you may need to change your lifestyle by getting a smaller apartment or getting an additional source of income. You may also file for bankruptcy if the options above are not favorable. Other plans you have in mind might work for you, but the first thing is to make a plan and take a drastic decision.
Pay above the minimum payment
Paying above the typical APR, let’s say 15% APR of your credit card balance, can fasten your payment process and reduce the interest on your debt. If you carry a credit card of $15,609, monthly payments of $625 ensure you clear your debt in 13.5 years. These 13.5 years may even be challenging if you add balance within the years.
A faster way to pay your student loans, personal loans, or credit card debt is to make above the monthly payment because it will hasten your payoff process. You should also check if your loan has prepayment penalties so that you won’t run into other problems.
The Snowball method ensures you enjoy some psychological win
The snowball method speeds up your payoff time and builds momentum and psychological win to pay off the larger debt. This method works wonder if you have the zeal to pay more than the minimum monthly payment.
The first process is to list all your debts from the smallest to the largest and completely pay off all the small ones first with the extra amount you have at hand while maintaining the minimum payment on the larger ones. You can then put the extra money towards the larger ones once you paid off the smallest balances.
Paying off the smallest balance first gives the sense of psychological win that you are on top of the payoff plan and know you are left with the larger ones. This snowball tactic makes you put your extra dollar on the larger debts once you paid the smaller one till you are left with none.
Find an extra source of income
Snowball methods of paying off debt works wonder if you have an extra source of income to speed up the process. Earning more money augments your effort and also helps you come out of the debts faster.
You can learn a new skill to monetize; you may mow yards, babysit, do house cleaning service, become a virtual assistant, or do other things that could earn you some extra buck.
Freelancing gigs on Upwork, Payperhour, Freelancer, and TaskRabbit could earn you a substantial amount per job done to augment your debt. Managing money could help you come out of debt faster, but the best approach is to have more money to pay your debt.
Extra income speeds your payment and also reduces your interest when you pay faster than the due date.
Use two shovels – debt avalanche
Apart from the snowball process, you may use the debt avalanche to clear your debt. A debt avalanche means eliminating the highest-interest debt first, follow by the next highest-interest debt, and continue till you reach the debts with a favorable interest rate.
The two shovels model hasten the payback period, although this tactic is not as effective as consolidation.
The debt avalanche ensures you improve the overall rate you diminish your debt to make you edge closer to the magic number your bank requires before they grant you a consolidation loan. After getting the consolidation loan, doubling your debt payments will clear your debt faster.
Sell the items you don’t need to pay your debts
Selling the items you don’t need gets you additional cash to pay up your loan quicker and cut your expenses. Almost everyone has stuff lying fallow in their homes without using them. Sell those items and pay your debt. The chances are that those items won’t have values after some years, so why not cash in on them now?
The good old-fashioned garage sale is a cheap and easy way to sell the items you don’t need for extra bucks. You may also choose a consignment shop; choose online resellers or a Facebook yard sale group.
Live within a budget
Cutting your expenses can be practical when you live within a budget. You should cut your budget within the means that cater to your basic need and not be too flamboyant to cost extra expenses. A bare-bone budget is different for everyone.
However, you may want to cut out eating out, cable television, watching a live match at a stadium, or any extra unnecessary sending.
You may find this bare-bone budget stiffening and frustrating initially but remember the budget is not permanent, but the period to reduce your debt. You can start spending and including your hobbies in your expenses once you clear your debt.
Asking for lower interest rates on your credit cards, consider a balance transfer, paying balances with ‘found money,’ and dropping expensive habits are other methods to pay off your debt. Also, stepping away from the temptation that might land you in debt could help you pay your debt faster.
Debts may cost you high blood pressure as it dominates your mind always. Being intentional about getting out of debt is the first process. Remember that this phase will not last, and you will enjoy your monthly income in peace and at ease when your neck is not deep in debt.