Debt can be a big source of stress and anxiety for a lot of people, and it can make it tough to reach your financial goals while living the life you want. Fortunately, there are steps you can take that may be able to help you work towards living a debt free life and gaining some control of your finances. Here are eight tips to help you get there.
1. Create a Budget and Stick to it
Creating a budget is an essential step in your overall debt management plan. Start by taking a close look at your income and expenses. List all your sources of income, including your salary, bonuses, and any other sources of money. Next, list all your expenses, including your rent or mortgage, utilities, groceries, transportation, and anything else you may have.
Once you have a clear picture of your income and expenses, create a budget that takes into account all of your necessary expenses, as well as any discretionary spending. Make sure you allocate a portion of your income towards paying off debt.
One way to potentially help yourself stick to your budget is to use an app or software to track your spending and stay within the financial parameters you’ve set for yourself. You can also use cash envelopes to help you stay on track with your spending. Each month, put cash in an envelope for each category of spending, such as groceries, transportation, and entertainment. When the money in the envelope is gone, you know you've reached your spending limit for that category.
If you want some more ideas for ways to budget, you can check out MoneyKey’s Ultimate Budgeting Guide.
2. Pay off your Debts
The next step in living debt free is to actually start paying off debts. One strategy to start doing this is to use the debt snowball method. With this method, you start by paying off the smallest debt first, while making minimum payments on all your other debts. Once the smallest debt is paid off, you move on to the next smallest debt, and so on. This method can help you build momentum and stay motivated as you pay off your debts.
Another strategy is the debt avalanche method, where you start by paying off debt with the highest interest rate first, while making minimum payments on all of your other debts. Once the highest interest debt is paid off, you move on to the next highest interest debt, and so on. This can help to lower the total amount you pay on interest across all your debt accounts.
Regardless of which method you choose, the key is to make paying off debts a priority. Allocate as much money as you can towards paying off debt and do your best to avoid taking on any new debt.
3. Live Below your Means
Living below your means is a crucial step in living debt free. The general idea is to not spend more money than you earn and avoid unnecessary expenses. One way to help you live below your means is to focus on your needs rather than your wants. Prioritize your essential expenses, like housing, food, and transportation, and cut back on non-essential expenses, like dining out, shopping, and entertainment.
Another way to live below your means is to avoid lifestyle inflation. This happens when your expenses start to creep up as you start to earn more income. Instead of increasing your expenses, allocate any extra income towards paying off debt or saving for the future.
4. Build an Emergency Fund
Building an emergency fund is an important aspect of most people’s financial portfolio. Essentially, an emergency fund is a designated savings account that is reserved for emergency situations, like unplanned car repairs, emergency medical expense, or job loss. Ultimately, it’ll be up to you to figure out what constitutes an emergency for your particular situation, but in any case, having an emergency fund can help you avoid taking on debt when unexpected expenses arise.
To build an emergency fund, start by setting a savings goal, such as three to six months' worth of expenses. Allocate a portion of your income towards your emergency fund each month, and consider automating your savings to make it easier to save.
5. Avoid Using Credit Cards
Credit cards can be a convenient way to make purchases, but they can also be a source of debt if not used responsibly. Avoid using credit cards for non-essential purchases, such as dining out or shopping, and instead use cash or a debit card. If you do use a credit card, make sure you pay off the balance in full each month to avoid accruing interest and accumulating debt.
One way to avoid using credit cards is to leave them at home when you go out. If you don't have your credit card with you, you won't be tempted to use it for non-essential purchases.
If you do need to use a credit card, consider using a rewards card that offers cash back or points for purchases. Make sure you pay off the balance in full each month to avoid accruing interest and to maximize the benefits of the rewards program.
6. Seek Professional Help if Needed
If you're struggling to manage your debt or create a budget, it may be helpful to seek professional help. A financial advisor or credit counselor can help you create a plan to pay off your debts, manage your finances, and achieve your financial goals.
A financial advisor can also help you create a comprehensive financial plan that takes into account your long-term financial goals, such as retirement or saving for a down payment on a home. They can also help you navigate complex financial products, such as investments or insurance.
On top of these things, they can help you create a budget, and develop a debt management plan or get credit card debt help by offering you guidance on how to pay them off. They can also provide education on managing your finances and avoiding debt in the future.
7. Consider Downsizing
If you're struggling to make ends meet or are burdened by debt, downsizing your home or car could be a smart financial move. A smaller home or car could mean lower expenses on mortgage or rent, utilities, maintenance, insurance, and gas, which can free up money to pay off debt, build your emergency fund, or invest in your future.
Consider moving to a smaller house or apartment that is more affordable, or downsizing to a more fuel-efficient car that’s cheaper to maintain and insure. While downsizing may require some lifestyle adjustments, it can be a way to reduce your financial stress and improve your financial well-being in the long run.
8. Stay Motivated and Track your Progress
Becoming debt free can be a long and challenging journey, but it's important to stay motivated and track your progress along the way. Celebrate small wins, like paying off a credit card or reducing your expenses, and use these successes as motivation to keep going.
Tracking your progress can also help you stay on track and adjust your strategy as needed. Consider using a budgeting app or spreadsheet to monitor your income, expenses, and debts, and track your net worth over time. Seeing your progress can be empowering and motivating, and can help you stay committed to your goal of living debt free.
Work Hard to Pay Off Debt
Paying off debt is possible with the right mindset, discipline, and strategies. By creating a budget, paying off your debts, living below your means, building an emergency fund, avoiding using credit cards, and seeking professional help if needed, you can take control of your finances and achieve your financial goals. On top of these things, downsizing your home or car can help you save money, while staying motivated and tracking your progress can help you stay on course to becoming debt free. It may not be easy, but it's worth it to live a life free from the stress and burden of debt.