Written by Dusty Beddoe | Do you feel the onset of a panic attack every time you think about your finances? You are definitely not alone. We’ve put together a few simple strategies for getting out of debt faster. No matter which strategies you choose, the first step is a must:
1. Budget
Examine your financial situation and create a budget that you will follow strictly. Start by making a list of all your debts (loans, credit cards, mortgage…). Don’t forget legal obligations like overdue taxes. List the name of the account, balance and interest rate or penalties. Your budget should also include recurring expenses like rent, insurance, essential living expenses and non-essential living expenses. By separating monthly living expenses into essential and nonessential, you will know exactly where to cut expenses first.
Now that you have your list of debts and expenses, compare your current spending to your income. If you’re spending more than you’re making, it’s a problem and it needs to be handled immediately. Even small changes can have a big impact on overall spending.
Read also: How to Save Money: 10 Small Changes That Can Save You Thousands
2. Prioritize Debts
Your highest priority should be anything you’re legally obligated to pay. Defaulting on these debts can land you in jail, so you’ll want to be sure they’re covered before anything else. Second to legal obligations are debts in default or those that have been turned over to a collection agency.
Organize the remaining debts by interest rates, with higher rates receiving higher priority. Although, if you can’t make the minimum payments on all your debts, secured debts should take priority over unsecured debts, regardless of interest rates.
3. Contact your Creditors
Simply call your creditors and request lower interest rates on your outstanding debts. If you don’t feel comfortable doing this yourself, have a nonprofit credit counsellor do it on your behalf.
4. Consolidate Debts
Consolidation generally involves taking out one low-interest loan to pay off all outstanding debts. The goal is to save money on interest and simplify repayment by eliminating multiple payments to different creditors.
The right type of consolidation depends on your situation, but a few options include a line of credit, personal loan or balance transfer credit card. U.S. residents may be eligible to enroll in a Debt Management Plan (DMP) through a National Foundation for Credit Counseling agency. Canadians can visit the Financial Consumer Agency of Canada website for more info.
5. Consider Debt Settlement
Many creditors will accept a one-time settlement payment that is significantly lower than the amount owed, rather than risk nonpayment. Contact your creditors directly to discuss settlement options. Remember it is a negotiation, so start by offering them twenty-five percent of the total balance. If you are able to agree on a settlement that is within your means, you could save up to 75%. However, there are potential disadvantages to settling debts, like income tax on forgiven debt or a lowered credit score. If you still feel overwhelmed or you are having trouble deciding which strategy is right for you, consult a nonprofit credit counselor. A counselor can advise you and set you up with a customized debt management plan.
Once you are out of debt, your new financial freedom will make your budget a bit more flexible. However, you should continue to budget wisely and build wealth by saving and investing.