Do you wish there was a way to get out of debt fast? Being debt free could free you from stress and free up money for vacations, cool toys, and retirement. With debt being such a problem in today’s society it would help millions if not billions of people to know the difference between good and bad debt and how to get rid of their bad debt. Also contributing to the debt problem is a rise in the cost of living and the standstill growth of income for the past 12 years running. Just being able to manage your money correctly isn’t enough today. But if you follow these 4 simple steps it will help you become debt free and help you on your journey to achieving financial freedom.
Step 1: Knowing How Much Debt You’re In
According to NerdWallet.com, consumers vastly underestimate or underreport how much credit card debt they have. In 2013 alone, lender-reported credit card debt was 155% greater than borrower-reported balances. You are only hurting yourself by not knowing exactly how much you owe your debtors.
So, find out just how much you owe for the credit cards, the car, the house, etc. Also, find the interest that you are paying for each loan/debt. Once you’ve got your number for each debt its time to know which debt to get rid of and in what order you should be paying them off.
Step 2: The Difference Between Good Debt and Bad Debt
I have an in-depth explanation on this very topic. However, we will go over a brief explanation. If debt is used to purchase an asset (which increases your income) then it’s good debt, but if debt is used to purchase liabilities (which cost money and lose value) then it is no longer good debt (bad debt). However, this is not set in stone all of the time.
Read More: Good Debt vs Bad Debt
Step 3: Prioritize Your Loans
After knowing just how much debt you’re and whether it is good debt or bad debt its time to start paying off that bad debt. The way you chose to pay your loans determines how successful you’ll be. After finding how much you owe for each loan/debt and the interest paid on each; it’s important to pay them off in a certain order. Start by paying the debts that pose a direct financial problem. The ones that may lead to repossession of your property or unwanted court visits. Once these are removed you can start paying off all other debts.
Warning: At no time should you stop paying off one debt to help pay off another debt, or just to pay off another debt faster. This will hurt your credit and we DO NOT want to do that.
Many would tell you to start paying off those debts which have the highest interest. This is WRONG! You’ll want to put all of your available money into paying off the smallest dollar value debt first. This way once the first debt is paid off, the payment for that loan/debt and your available money goes towards paying off the next lowest debt. By the time you get to your biggest debt, you’ll have so much money put towards paying it off that, it and all of your loans/debts will be gone in no time.
To find out how much available money you have to help pay off your debts you’ll want to create and stick to a budget.
Step 4: Extra Steps to Get Out of Debt Fast
Raise Your Revenue/Income
The number one reason we all borrow is to make up for the inflation of prices which is paired with the non-existent rise in income. Whether it is you as a person or your company that is in debt, a great way to help get rid of your debt fast is to increase your revenue. As an individual, there are many ways to boost your income. Some of the ways may include taking a second job, taking an online job, opening an e-commerce business or getting into a part-time business. You can also opt to find a higher paying job. All of these options will help you get enough cash to handle your bills without having to borrow.
Read More: How to Make Money and Increase Income
Sell Some of Your Assets/Properties
Most people don’t like thinking about this option, but it is a good way to get extra cash which could be used to help pay off your debts. It is wise to sell off any assets that are not vital to you so you can clear these debts. Things like extra cars or homes can be sold off. Go around your house and find all of the things that you can sell. Find out how much they are worth online and you might just be surprised at how much the cash you have sitting around your house.
However, you should also be careful not to sell your primary assets. Do not sell the home you live in to pay off a debt. Only sell the extra assets that are not critical. However, if the asset is worth more than the loan the wise thing to do is sell it, pay the loan and keep the extra cash. If you’ve read ‘good debt vs bad debt‘ you would know that, contrary to popular belief, owning a house is bad debt.
Lower Your Standard of Life
There is no point in living a high-end life on debts. If you are living an expensive life and wallowing in debts, it is time you make the critical decision. You do not have to completely lower your living standards. You can start by cutting down some unnecessary expenditures. The first things you should cut off are the luxury products. You don’t need to have a third car when you’re not financially stable.
If your still not making ends meet and your debts are still rising, it may be wise to go further. Which may include making major changes such as downgrading your apartment size or moving to a cheaper estate. This is where you’d want to reduce the amount paid on rent and other amenities. This is a practical way of saving up some extra cash to repay your loans.
Transfer Your Balance to Lower Interest Cards
If you have a lower interest credit card, it is advisable to transfer your balances. This will help you pay your loan at a lower interest. However, you should make sure you have a proper understanding of your credit cards before you get into such business. In some cases, you may be forced to pay double interest rates.
Consider Debt Consolidation
Debt consolidation is the other option to help you get out of your debts. It can be done for both business and personal debts. This is done by borrowing money from a single source to pay off your creditors.
This is helpful in that, instead of having to deal with different organizations you only pay your debts to the consolidator. This also helps reduce the interest rates. If each of your creditors imposes their own interests, the sum you will pay overall may be much higher than when you clear the debts at once and have to deal with the interest rates imposed by your consolidator.
Warning: You should be careful with this method. There are plenty of scammers in the consolidation business. If you have to get into such an agreement, it should lead to you paying less monthly installments in general and also pay less sum at the end. You should try to make some calculations before you settle for this option and make sure it is viable. You should be seeing a financial advisor before every big financial decision, but you MUST see one before doing this.
File for Bankruptcy
This is not encouraged especially for individuals who still have the means to pay their debts. However, if it comes to a point when you cannot pay your debts, it is time to think of this option. There are two types of bankruptcy, the chapter 7 and chapter 13 bankruptcy. In case you are completely unable to pay all your debts the Chapter 7 bankruptcy will be applied. In this case, a trustee is appointed to sell all your none exempt properties to facilitate the payment of your debts. However, if you do not own any none exempt properties then you may get off the hook without paying your debts. The exempt properties include your home and other basic assets that you must have. The exempt properties cannot be sold even if you owe your creditors.
The chapter 13 bankruptcy is usually applied on large corporations and companies. However, even individuals may apply for it. In this kind of bankruptcy, an agreement is made on how to facilitate the payment of the debts. You should have a steady income to apply for this kind of bankruptcy.
There are times when we cannot avoid getting into debts. Getting into debts can lead you into a deep web of borrowing. If you can’t find a proper way of dealing with your debts, you may end up losing everything you own in court or reposition. It is therefore important to find a reliable way to pay your debts.