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In the US the total debt has reached $13.21 trillion, and Canada, with a population of 37 million, around 40% are said to be in debt. In this how to get out of debt fast: a step by step guide, we'll talk about why it is important to get rid of debt and have a look at some tips that actually work.
Taking debt varies among people on the basis of age. Here’s the rundown:
- People aged under 35 take $67,400.
- People who are between 35 to 44 take $133,100.
- People ranging from 45-54 of ages take about $134,600.
- People between 55-64 take $108,300.
- Elderly people (65-74) take around $66,000 as debt.
- People who are more than 75 years of age take around $34,500.
The number is alarming and there is a need to make a move. Debt can destroy your financial standing and prevent you from enjoying your life to the fullest.
Why It Is Important To Get Rid Of Debt?
On average, the average Canadian citizen owes $1.70 for every single dollar of income per year, after taxes thanks to the household debt being 170% of the household income.
The situation is said to be worse in the US where the average citizen owes around $38,000 in debt. Moreover, 8 out of 10 Americans are in debt. This is a concerning factor because unplanned debt can pile up drastically and leave a person broke.
When you don’t pay your debt on a timely basis, it can lead to depression, stress, anxiety and poor health. Plus, debt can keep on increasing over time due to interest and other charges.
Moreover, the most worrisome thing is that people often choose to take more debt to get rid of their previous debt. This may appear like a good thing on paper but it can backfire.
The Importance Of Knowing How Much You Owe
Let’s consider a simple scenario here. Imagine you are saving money on a monthly basis to take your family on a vacation. The simple approach would be to determine the total cost required for the trip. In simplicity, the average man would save a certain amount of money every month for a few years until he reaches that total amount.
Debt is almost the same. It is important to first know how much you owe in order to pay it. You won’t be able to devise a debt-paying plan until you know a final amount because without knowing the actual figure, how would you determine a monthly-returning amount?
Apart from that, you can’t kick in future plans until you have paid your debt back.
How To Know The Exact Amount Of Debt You Owe: There are various ways to find out the amount of debt you owe. Let’s discuss the easiest and most reliable ones.
- Credit File: It is an online credit file that gives most of your credit history. This file holds information regarding loans, cards, bank accounts, and the credit you have taken from somebody. You can use this information to calculate your debt.
- Emails And Letters: Your credit – be it a person or an organization – would send you regular emails and letters regarding the money owed. You can use this information to calculate how much money you actually owe.
- Contact Your Creditors: It might be a good idea to get in touch with your creditors to be clear about the amount of money you owe.
- Check Bank Account Statements: Contact your bank to help you out with old statements. It would give you an idea of how much you owe.
In the end, add up the total debt and you’ll know the exact amount you owe.
Tip: It’s best to create a ledger or file and keep a record of the amount you owe as it occurs. This will save you a lot of time and effort.
Assess Which Debt You Need to Pay Off First
Many of us have more than one debt which can make it difficult to decide which one to pay off first. Psychology suggests to get rid of the smallest debt first but calculations say to clear the highest-interest rate debt first. However, we'd suggest you go for the method that you'll find easier to stick to.
Choose your Prefered Method to Pay Off Debt Fast
There are several techniques to choose from. Each strategy has its own pros and cons. We have two of the most popular methods below:
Snowball Debt Method – Smallest Debt First
This debt-reduction strategy involves owing on more than one account and getting rid of the smallest balances first.
Doing so helps in managing deadlines in a good manner. This technique is usually applied to revolving credit like credit cards.
Here’s the process:
- Prepare a list of all your debts and put them in order (lowest to highest in terms of interest rate).
- Pay as much as you can to get rid of the least expensive debt after paying the minimum balances on your other loans
- Move to the next option after getting rid of the smallest debt and keep doing so until you’re debt-free.
- Has a positive psychological effect
- Your cash flow grows very quickly.
- Is simple as it doesn't involve complex calculations
- You may end up paying more in interest
The Avalanche Method – Most Expensive Debt First
This method is focused on paying high-interest debt first.
This will help pay off your debt quickly because piling up a debt that has a high-interest rate is a bad idea. It will keep on increasing and will consume more of your income on a monthly basis. Therefore, paying off high-interest debt can be a wise choice.
Here’s the process:
- Prepare a list of all your debts and put them in order (highest to lowest in terms of interest rate).
- Pay as much as you can to get rid of the most expensive debt after paying the minimum balances on your other loans
- Move to the next option after getting rid of the highest or most expensive debt and keep doing so until you’re debt-free.
- You have to pay less in interest
- You’ll go debt-free quickly
- It can be difficult to stay motivated
Let’s say you have 5 loans:
- $800 at 10 percent
- $1,000 at 12 percent
- $700 at 9 percent
- $300 at 3 percent
Debt Avalanche: You'll make minimum payouts on all loans except the $1,000 balance since it's the most expensive one. You will spend all the money left on getting rid of this first. Once done, you'll move to the next most expensive debt that is $800 at 10 percent.
Debt Snowball: You'll make minimum payouts on all loans except the $300 balance since it's the smallest one. You will spend all the money left on getting rid of this first. Once done, you'll move to the next smallest debt that is $700 at 9 percent.
Which Is The Right Option: It is hard to tell. If you are disciplined then go for the second option. It saves money but can be hard to stick to.
If you lack discipline then go for the snowball method since it offers more motivation despite costing more as well.
Use The 50/30/20 Rule For Budgeting
It’s important to create a budget and to stick to it so that you can easily get rid of your debt. Incorporate the 50/30/20 rule of budgeting to ensure you do not end up ruining your plan.
According to the rule:
- 50% of your income should go in essential expenses such as rent, electricity, groceries, utilities, transport, insurance, life cover, and medical aid.
- 30% should be spent on your wants, that is, your lifestyle. It covers membership fees, night outs, etc. If possible, try to reduce this category and use more money to save or get rid of the debt that you owe.
- 20% of your income should be marked for debt repayments and savings. You need to be clever about how much to save and how much to spend.
This formula will help you stay on the right track.
Drawing The Budget On Paper: You cannot just device a plan in your mind and expect to remember everything by heart. You need paperwork for this.
Create an Excel sheet with relevant headings and put all your expenses in the right category.
Note: Make sure to calculate 50%, 30% and 20% of your income.
Add Up Any Extra Income (if any): Make sure to add every single penny you earn. It can be difficult for some people to include all their earnings if they do not get a fixed paycheck.
If such is the case, you must do a bit of calculation so that you can reach a true picture.
Balancing Non-Important Expenditures With Debt Repayments: Allocating 50% to important expenditures and 30% to lifestyle might not be enough to pay the debt. If such is the case, you should consider revising the plan.
It’s very important to revise it because it may otherwise get difficult to follow the plan. If such is the case, you should cut down your expenses from the 30% devoted to lifestyle.
It’s better to not touch the necessity section (50%). You can delay the holiday you have been planning for or reduce your night out trips.
Such small changes can make a lot of difference in your financial life.
Update Your Lifestyle
If the amount of debt on you is taking forever to pay then you need to take your savings game up a notch. But, how can you do that? It requires sacrifice and some lifestyle changes.
Start by replacing your car with a cheaper one or moving to a house that costs you less in terms of rent and maintenance. The amount saved can be used to pay the debt.
These, however, are major changes. You must think carefully before you take such actions as it will have an impact on not just you but also your family members.
Pay More Than the Minimum Amount (Debt)
If you have money in your hand then use it wisely to get rid of debt as quickly as possible. You can use any of the two methods explained above. Doing so will allow you to get rid of debt quickly.
Cut Unnecessary Expenses /Habits
It’s important to save money and the best way to do so is to reduce expenses. However, most people struggle to differentiate between necessary and unnecessary expenses.
If you can’t do without something then it’s necessary, if you can do without it then it’s unnecessary. Food, for example, is a necessity but dine out is not.
Sell Unused Stuff
If you have items lying around that are of no value to you then hold a garage sale or put them up for sale on the internet. It can bring you a decent amount of money that you can use to make payments.
It may also be a good idea to change your lifestyle and get rid of things that cost you a lot of money. These include air conditioners and other such items.
Improve Your Spending Habits
Know where and when to spend money. As difficult as it may sound, you may have to rethink your hobbies. Opt for cheaper alternatives. For example, choose a cheaper gym and play a more affordable sport.
Get a Cheaper Car
Most people spend about $120 per month on running and maintaining a vehicle. The amount can be higher if a car is older. Consider opting for a cheaper option. Some very expensive cars offer poor mileage and can turn out to be very costly in the long-run. Hence, choose a car that’s fuel-efficient and easy to maintain.
You can also consider other lifestyle changes such as moving to a cheaper home or buying less expensive clothes.
Halt Credit Card Transactions
It’s not wise to use your credit card when you already have a massive debt to pay off. Lock away your credit card and do not use it until your debt is paid.
Use your wallet instead to deal with expenses. You can even use the envelope method to ensure you do not end up spending more.
The envelope method includes using an envelope instead of a wallet. You only carry the amount you need, which prevents you from spending more. It can be quite effective in controlling your budget.
Try to Renegotiate The Deal
You may have the option to renegotiate the deal and make some changes to the terms and conditions including the interest rate and time you have to clear the debt. Some of the options include:
Refinance or Consolidate Your Debt
First of all, let's be clear that consolidation and refinancing are not the same. Consolidation refers to combining multiple loans into a single loan. On the other hand, refinancing refers to replacing one or multiple loans with a new loan that's easier and often cheaper to pay.
Refinancing can be a good option, especially when it comes to student loans since student loan refinancing rates recently dropped to 2.01% in the US. Consider this if you have good credit, decent income, and a graduate degree.
On the other hand, consolidation can be a suitable choice if you can manage to get a cheaper deal.
Consider a Balance Transfer
A balance transfer refers to the transfer of balance from one account to another. A balance transfer can be quite beneficial when it comes to credit cards since some credit card companies offer special rates including 0% interest balance transfers.
This can prevent you from having to carry the burden. But, remember that this special rate usually only applies to the first year and you may have to pay a transfer fee, which is about 3%.
Balancer transfer can also be used for other debts such as car loans, home loans, medical bills, and student loans. The type and amount of balances one can transfer depends on a number of factors including credit score and the type of loan.
Negotiate Bills and Subscriptions
If you have subscribed to a bunch of services such as streaming services, gym, magazines then first consider canceling services that you do not need and next consider negotiating bills and subscriptions.
Some professional companies and service providers such as Trim and Truebill can help you manage bills and negotiate a lower amount for your bills. Plus, companies are often willing to reduce subscription fees, especially if you sign up for 12 months or more.
Increase your Income
If you are struggling to pay off your debt because then you need to increase your income. Here are some tips:
Ask For a Raise
You will never get it if you do not ask for it. If you’ve been working for a company for a good few years and haven’t had a raise then discuss the matter with the concerned department. While it may not always work, letting your company know you’re unhappy with your paycheck may push them to consider a raise. Other than this, you may also look for higher-paying jobs.
Earn More With a Side Hustle
If your monthly income is not enough to pay your bills then consider opting for a side hustle like starting your own video channel (monetized) or selling affiliate products online/offline. Check out some unique ideas to make money online. Start looking for opportunities and make sure to use this extra money wisely.
Get a Seasonal Part-Time Job
If you’re doing a 9 to 5 job then you can try a part-time job for a few months. A few extra dollars can make a huge difference in this matter. Some good options include driving for Uber, working as a freelance writer, or your local library over the weekend.
A part-time job can often pay well but make sure to be careful about your health as working more than 40 hours or not getting enough rest in between can take a toll on your health.
Set Goals and Stay Accountable
It is very important to set financial goals and to stay within your limits. Remember the tips:
- Make a budget and stick to it
- Calculate your expected expenditure and make sure to remain within your means
- Take steps to improve your income
- Reduce your expenditure
- Use a mobile app like Wallet to keep a track of your finances
Your main goal should always be to stay away from debt including credit card debt and the best way to stay true to your goal is to live within your means.
How to Stay Debt Free
There are a few steps that everyone must follow to stay out of debt.
- Create a realistic budget.
- Stick to your budget and do not deviate from it.
- Seek help from your spouse or family member to monitor the budget.
- Monitor your expenses.
- Always have some emergency funds in your account.
- Stop using credit cards (if you do, make sure not to miss out on credit card payments).
- Do not take cash advances.
- Use all your extra money to pay off debt.
If you stick to these points, you will steer clear of debt.
The best way to get rid of debt is to take no loans. However, it can be a bit difficult to live without a credit card in today’s world. Your best bet is to create a budget according to your income and to stick to it.
If you do not earn enough money, then work on finding a side hustle. Also, control your expenses and save money for the rainy days.
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