There is no magical way to get out of debt. It requires careful planning, sticking to a budget, consolidation of debts, and then calculating the best order in which to pay them off.
Controlling Expenses by Sticking to a Budget
In order to control expenses, one must first know what they are. So the first step is to record everything that is being spent. This is difficult to do, but quite possible. The individual should then work out where money can be saved, perhaps on food by shopping at cheaper supermarkets, or on fuel bills by changing supplier. Money can be saved on things like car insurance and home insurance by shopping around, and every little bit saved can go towards making you debt-free.
All debts have different interest rates. Many people have a great deal of credit card debts at a high rate of interest, because over-spending on credit cards is so easy. Bank loans, on the other hand, have a much lower rate of interest. If possible, get a relatively low interest loan, and use it to pay off the credit card and other high interest debts.
What Order to Pay off Debts – the ‘Debt Snowball’
The ‘Debt Snowball’ is the tried and tested way of paying off debts – and it works.
Basically one pays off the debts with the highest interest rate first. The individual first needs to list all their debts in descending order of interest rate, regardless of the balance. Determine the most money you can make available from your budget to pay off debts, and apply that to the debt with the highest interest rate. As soon as one does that, the amount owing will be reduced. The next month, the individual pays off the same amount of the debt with the highest interest rate. On all other debts, continue to make the minimum payment.
When the first debt is paid off, continue the process with the debt with the next highest interest rate. At all times, stick to your budget, and continue to pay off the same amount each month.
As the individual continues to do this, the amount of interest gradually reduces, and more money is being used to pay off the actual debt, ie the process ‘snowballs’.
Various websites provide online Snowball calculators so that the individual can see for himself how the process would work for him.
If a person follows the above process, he or she can become debt-free in a surprisingly short time. It is not easy, but the main things that are required are planning, self-discipline, and organization. It can be done!