Living debt free is something so many people desire, but it may seem like a daunting or nearly impossible goal to accomplish, especially when you find out nearly 80% of Americans are burdened by debt. Although this figure is concerning, that doesn’t mean you have to be a part or remain a part of the statistics. Paying off your debts may not happen quickly, but it can be achieved by being more thoughtful about your budget and channeling a little perseverance!
Not sure how to get started? Follow along for some tips to achieve financial freedom.
Create a Plan of Action
You will want to start by taking a look at all your debt and create a plan of action. It may seem more convenient to only pay your minimum monthly balances, but being strategic with your payments will make it easier on you in the long run. One of the issues with only paying the minimum amount due is that you run the risk of accumulating interest and actually increasing your overall debt, rather than lowering it. To avoid this, make sure you have a plan in place for how much over the minimum amount you can pay off and which debts to pay off more aggressively.
There are a lot of different ways to go about eliminating debt. Two of the most common strategies include the debt avalanche or debt snowball method. The debt avalanche method involves first tackling debt with the highest APR. Alternatively, with the debt snowball method, “you would prioritize paying your debt from the smallest balance to largest, regardless of APR”. Of course, these two methods are not the only means of eradicating debt. If you feel that neither of these two approaches works for you, you can always explore other options or try out a method of your own. One such option may include consolidating debt through a personal loan if you have considerable outstanding debt through multiple lenders. Whichever way you choose to pay off your debt, be sure to devise a plan in advance to help you stay confident and consistent.
It’s harder to pay off debts when you’re not budgeting on a regular basis. Setting a budget will not only help you limit your spending, but it can also help you set aside a fixed amount of money to use toward your debt. Determining a budget starts by calculating your monthly income and expenses. This will give you a better idea of exactly how much money you have left over after covering your necessities, such as rent and utilities.
Unfortunately, even if you establish a budget, you still have to pay bills. In fact, creating a budget may be the first time you recognize just how much of your income is going towards things like your phone, internet, and rent. While it’s important to determine how much those bills amount to, it’s even more advantageous to assess those expenses to see if there are ways to lower the cost of each.
Once you come up with a budget based on the above factors, try to incorporate a set amount of your debt payments into your monthly budget. This way, you’re able to get a better idea of how much over the minimum amount you’re able to pay off every month. Setting a budget really comes in handy in this regard because it will help you get into a habit of accounting for your debt. This may help you avoid spiraling into greater debt. Remember, effective budgeting is one of the keys to financial stability.
Plan Ahead for Upcoming Purchases
A common concern of individuals who have a goal of eliminating debt is how to pay one’s dues while also prioritizing major upcoming purchases. This is not impossible but requires some forethought and research. Before you do extensive research, you need to think about exactly what major purchases you want to make in the near future.
One of the biggest, life-changing purchases anyone can make is buying a home. If this is in your near future, you’ll want to factor this into your budget and overall financial planning. There’s quite a bit involved in purchasing a home. Something important you can do to prepare is to determine how much house you can actually afford. This will help you set realistic expectations and figure out how much money to put aside for this purchase. After all, you don’t want to increase your debt by purchasing a house you can’t really afford. Determining how much house you can afford can also give you a starting point when it comes to house hunting. If you start looking at homes in your price range and find that they don’t tickle your fancy, you can set a goal of increasing your budget. This may involve saving more to contribute towards a down payment, finding a more lucrative job, or paying off your debt more quickly.
Another big ticket item you may be planning for is a car. Whether new or used, leased or financed, it is absolutely possible to possess a car and budget effectively. Before you get to that point, though, it’s important to do your research. Not only are there many cars to choose from, there are many ways to finance vehicles, along with various insurance options. While most cars are not as expensive as a home, it’s still advantageous to seek financial advice with regard to acquiring a car.
Prioritize Your Spending
Factoring in all of your necessary expenses is crucial. But what about your wants? Those don’t go away just because you set a goal to eliminate debt. However, you may have to exercise greater self-control and make some sacrifices to realize your objective. It would be wise to temporarily limit your spending while you pay off some of your bigger debts. For example, things like pausing your streaming subscriptions or cooking your own meals can make a big difference.
In fact, there are numerous ways that you can save money every month. One major thing you can do is stop impulse buying. For instance, if there’s something you desire while online shopping, taking a day to sleep on it can help you determine whether it’s really worth the money. You can put the worthiness of prospective purchases into perspective by considering how much money and time will eat into your debt payoff plan.
Reducing spending in order to save more is probably one of the biggest hurdles to achieving financial independence. We are constantly being bombarded with direct and indirect advertising, which can drive our desire to spend, even if we don’t really have the money. Further, some of us use shopping as therapy. Recognizing the impact of advertising and our own struggles with retail therapy is just as important as making the decision to cut out certain expenses. So be honest with yourself, and then try to make the necessary adjustments.
Financial independence is not beyond your reach. If you are currently a part of that eighty percent of people burdened by debt mentioned earlier, do not become discouraged. By applying the four tips above, you will be well on your way to separating yourself from that statistic and living debt free.