Consumer debt is a major problem in Western countries and is a widespread sickness. Debt has the power to destroy our mental health, obstruct our advancement, and limit our ability to accumulate wealth. The Federal Reserve Bank of New York’s 2022 report states that the total household debt in the US increased by $351 billion, bringing the total amount of consumer debt to an astounding $16.51 trillion.
Even though these figures are concerning, there is a way for individuals to break free from the chains of debt. This article will go in depth about steps that you can take to clear your debts so you could be in the best financial position.
Table of Contents
1. Put your cards on Freeze
The temptation of credit cards frequently results in impulsive purchases and growing debt in today’s materialistic-driven society. However, intentionally freezing your credit cards is a transformative tactic that is becoming more and more popular. This technique offers a brief pause before making dumb purchases, acting as a potent deterrent against wasteful spending. Freezing credit cards is a deliberate way to take back control of personal finances, not just a way to stop impulse purchases. It promotes responsible financial practices, contemplates needs over wants, and ultimately gives people the power to use their money to make more deliberate, morally-driven decisions.
You can create a disregard your physical card by taking them out of your wallet and hide them somewhere safe. Thus forcing yourself to think twice before making an impulse purchase
For extra security, make sure to clear out any credit card information that your internet browser may have stored. Keeping your open accounts open is also essential because closing them could have a detrimental impact on your credit score.
2. Clear your monthly balances
If you’re juggling debt, those monthly charges can feel like roadblocks on your path to financial freedom. Tackling these ongoing expenses on time is crucial for making strides towards a brighter financial future. It all boils down to sticking to a strict routine. If you opt to hang onto a credit card, handling it wisely is key. Pay off the full balance every time you use it, especially if it’s not joining the others in the freezer. Whether you’re swiping for $30 or $300, commit to clearing that bill by the end of the month.
If making bigger payments is out of your reach you should at least:
Pay the Least Amount Due on All Debts
To conquer debt, consistency is your ally. It’s not about sporadic payments but about setting up a rhythm that works for you. Start by paying the smallest amount you owe on each debt. By sticking to regular minimum payments, you keep your accounts in good standing with creditors, steering clear of those pesky late fees and penalties. When you commit to meeting these minimums month after month, you’re taking a proactive step in battling your debt head-on and inching closer to financial freedom
3. Make a Debt List
Making a list of your debts is more than just math; it’s like taking a peek at your financial history. It’s about realizing what debt you have, including loans and credit card debt, and taking the first courageous step toward regaining control. This list is your road map to financial clarity, not just a list of things you owe. It’s an opportunity to face the facts, establish priorities, and make plans to live a debt-free life.
Writing down your debts gives you the power to make decisions that will affect your future, not just so you can see the numbers. It’s your tool for decision-making and for beginning the tiny but significant steps that will lead to a better, debt-free future. Therefore, embrace the leverage of disclosing your debts—it’s your own compass pointing the way to financial independence.
Although taking handwritten notes is acceptable, using a spreadsheet to go over the specifics could make things go more smoothly. List all of your loans, including credit cards, mortgages, auto loans, and student loans. Include the total amount owed and the monthly installments you make, omitting taxes and insurance. Next, get to work on the math. Divide each debt’s total amount by the minimum payment due each month to crunch those numbers. This easy step lets you estimate the number of months it might take to pay off each debt. It provides you with a clearer picture to plan your path towards debt freedom, similar to taking a peek at your financial journey’s roadmap.
4. Start with the debt that has the quickest payback time
It might make all the difference in the world to begin paying off your debts by starting with the one that can be paid off the quickest. Not only are the numbers important, but it also gives you a psychological lift. Prioritizing the smallest debt gives you momentum and a sense of success as you quickly pay it off.
This little victory acts as a spark, giving you the confidence to take on bigger debts. It’s similar to opening a door to a future free of debt, one tiny triumph at a time. It’s not just a tactic to start with the debt that can be paid off quickly; it’s a mentality that helps you get financial freedom.
5. Determine Your Winning Share
Selecting the best budgeting percentages for debt repayment necessitates a thoughtful strategy based on each person’s unique financial circumstances. It’s important to find a plan that works for you rather than focusing only on set percentages. While there are those who support setting aside a certain percentage of income for debt repayment—such as the 50/30/20 rule, which allocates 50% to needs, 30% to wants, and 20% to debt and savings—it’s important to adjust these numbers to reflect your unique situation.
These percentages can vary greatly depending on a number of factors, including income levels, different debt interest rates, and necessary expenses. Finding a balance that permits significant debt repayment while upholding a sustainable lifestyle is crucial. Find a ratio that fits your financial objectives by experimenting, adjusting, and ensuring consistent progress in the direction of a life free of debt.
Apply your calculations
Organize your finances so that this set amount of your income is used exclusively to pay off debt. Make sure that the debts you prioritize have lower balances or higher interest rates so that your payments have the most impact. Prioritize your debts based on these factors. Make sure that this percentage is continuously applied to pay down any outstanding debt, including credit card debt, student loans, and other outstanding balances.
To find out how well this percentage is helping you reach your debt reduction objectives, keep a regular check on your progress. A few tweaks here and there may be required, particularly if your finances change. Being adaptive and flexible is essential. You’re taking proactive steps toward financial freedom and a debt-free life by making sure the allocated percentage is applied to debt repayment on a regular basis.
6. Make entire monthly payment to subsequent debts
Redirecting the entire monthly payment towards the subsequent debt after a debt has been paid off can help you get debt free much faster. This strategy, also known as the debt avalanche or snowball method, entails applying the money that was previously allotted to the paid-off debt to the following obligation in line.
For example, if you were paying $300 a month to pay off a credit card debt and you were successful in doing so, allocate that $300 to the next debt on your list rather than spending it elsewhere.
You can expedite the repayment process by aiming for a new debt while keeping the same total monthly payment. This strategy keeps the momentum going while also increasing the amount of time you can devote to paying off subsequent debts and acquiring confidence from every debt triumph. With every debt paid off, the total amount that can be repaid accumulates, bringing you one step closer to living a debt-free life.
7. Invest the extra money
It makes sense to think about investing the extra money you have after paying off debt and having extra cash from your monthly budget. You can increase your wealth and work toward your future financial objectives by investing. If you haven’t already, start by setting up an emergency savings account. This fund serves as a safety net, helping you avoid going back into debt by paying for unforeseen costs.
Think about long-term investment options such as stocks, bonds, diversified mutual funds, retirement accounts (such as 401(k)s or IRAs), and retirement accounts beyond just an emergency fund. Examine investment options that fit your timeframe, financial objectives, and risk tolerance. Do your homework and get help when you need it to make wise financial decisions.
Remember, the key to successful investing is consistency and patience. By consistently contributing the extra money from debt repayment into investments, you allow your wealth to grow over time through compound interest. This financial strategy not only secures your present but also lays the groundwork for a more financially secure future.
Getting rid of debt and practicing wise money management are essential to achieving financial independence. Every action made today creates a more secure tomorrow as debt decreases and prudent financial practices grow. You’ve accepted the path toward financial empowerment and opened doors to a future free of debt by embracing discipline and specific goals. Remain dedicated, enjoy the journey, and observe how each step takes you closer to the prosperity you deserve.