Owing money is never an enviable position to be in. Not all debt is bad – a mortgage will leave you paying the bank for decades, but with each payment, you’re building equity that you can tap later. But when it comes to high-interest debts like credit cards, you can quickly wind up trapped in a cycle, always paying but never getting any closer to freedom.
When you’re struggling with debt, you need a smart money strategy that will get you out of the red sooner. The earlier you can stop paying the banks and start saving for yourself, the better off you’ll be in the long run.
Take these steps to start your path to debt freedom.
Table of Contents
1) Get Credit Counselling
Are you paying too much in interest rates? If you’re deep in credit card debt, you probably are, but you’re far from stuck. Certified Credit Counsellors with a non-profit credit counselling agency can assist you negotiate with your creditors to reduce or eliminate interest charges altogether through a Debt Consolidation Program.
A Debt Consolidation Program can make all of the below steps easier and save you money in the long run. When you don’t have to worry as much about interest rates, you can make more progress paying back the money you actually borrowed.
2) Set a Goal
Before you can hope to succeed on the path to debt freedom, you need a powerful motivation. There will come times when your commitment wavers. It will be tempting to splurge on unnecessary expenses that will set back your plans. That’s when you need a strong motivation, a dream like buying a home or starting a business to keep you committed.
3) Make a Budget
A good budget is a realistic one. Before you can start, you have to figure out:
- Your monthly take-home income, after taxes and all other payroll deductions;
- Your fixed expenses, such as rent or mortgage that you can’t change without making some major lifestyle changes;
- Your variable expenses, such as utilities, gas, or groceries, which may be essential but change from month to month.
Once you have your income and expenses, you can see what’s leftover to put toward debt. You may need to find ways to reduce your variable or even fixed expenses to push that number higher.
4) Choose Your Target
If you’re juggling multiple credit cards and overdue bills, you can feel stretched thin and not sure what to do. The smartest thing you can do is eliminate your debts one at a time. Follow these steps and start making real progress:
- No matter what, keep making minimum payments on all of your accounts.
- Choose the account with the highest interest rate and put all of your additional income toward paying it down;
- Once it has been fully paid off, go to the next-highest interest rate until all of your debts are paid.
A smart money strategy isn’t just budgeting. It’s about minimizing how much money you have to pay in the end. Interest rates are constantly inflating the amount you owe. You owe it to yourself to keep those costs down as you get out of debt. The sooner you do, the more you’ll have for yourself at the end of it.