Getting out of debt is a great feeling. Many of us want to get out of debt but we do not know exactly where to begin. Having a plan to get out of debt is the first step. When you have a plan and specific goals, it helps you focus on the steps that you must take to achieve your financial goals. Below are several ways you can improve your financial well-being by taking control of your finances to get out of debt.
Make a Plan to Get Out of Debt
1.) The “Snowball” Effect
The “snowball” effect has been shown to be an effective way for many people to get out of debt. To begin, list all of your debts including the total amount owed, the interest rate being charged by the creditor, and the amount of the minimum monthly payment. Sort the list by the interest rate from the highest to the lowest. If you make the minimum monthly payment on debts with high interest rates, it will take you much longer to get out of debt because most of your payment is being applied to interest.
The snowball effect requires you to use most of your extra income (remember to save some for emergencies) to pay more than the minimum monthly payment on the debt with the highest interest rate and to continue making minimum monthly payments on all other debts. Once you pay off the debt with the highest interest rate, apply the money you were paying toward that debt to the debt with the next highest interest rate. As you pay off each account, the amount you will pay toward the next debt will grow helping you get out of debt faster.
2.) Create a Household Budget
It is very difficult to know where your money is going each month without a budget. Some people view budgets as denying them of what they want; however, using a budget actually helps you have the money to buy what you want by allowing you to save more money each month. Make a spreadsheet to track your expenses and income for two or three months. Arrange the expenses by category so that you can see exactly where your money is going each month. This will help you identify areas where you can cut costs and reduce expenses to have more money at the end of each month. Take the leftover income at the end of each month and apply extra amounts to your debts to get out of debt faster.
3.) Negotiate with Your Creditors
If you communicate with you creditors, most are willing to work with you so you can get out of debt. Instead of missing payments and ignoring telephone calls, contact each of your creditors and explain your current financial situation. Ask the creditor if your interest rate can be reduced and/or your minimum payment reduced so that you can continue making your payments. If you let creditors know that you want to pay back the debt and you are willing to work with them, most creditors are willing to work with you too.
4.) Get a Part Time Job
If you have the ability to work extra hours, consider getting a part time job to earn extra income to get out of debt. Use all of the money you earn at your part time job to pay toward your debts. By making extra payments each month toward the principal balance of each debt, you will save money in interest payments and get out of debt faster.
5.) File For Bankruptcy Relief
If you have tried everything possible to get out of debt and you are still unable to pay your bills each month, you may need to get assistance through the bankruptcy court. For some people, they just do not have any money left at the end of the month to pay toward debts after they pay their necessary living expenses. This is the reason why bankruptcy exists – to help individuals who are experiencing financial problems get a fresh start.
Unfortunately, many people wait longer than they should to seek the advice of a bankruptcy attorney. They try consolidation loans, use retirement funds, or use the equity in their home to try to get out of debt. In many cases, this only prolongs the process and puts assets at risk that would otherwise be protected in a bankruptcy case.
Bankruptcy not only resolves your debt problems but it also protects your assets from creditors. Before you decide to use your retirement funds, savings, or the equity in your home to get out of debt, contact our office for a free bankruptcy consultation. It does not cost you anything to get advice from experienced bankruptcy attorneys. You are not under any obligation. We want you to have all of the information you need to make the best decision for you and for your family.
For more information about the various solutions available to help you get out of debt, download our free Debt Solutions Comparison Chart.