While credit has the potential to significantly increase consumer purchasing power, the unfortunate truth is that its widespread availability has normalized debt for millions of individuals throughout the world. In fact, global household debt is currently estimated to be at a staggering $55 trillion, signifying that countless people have now become overburdened by their financial obligations.
If you find yourself struggling with debt, it’s easy to get bogged down and feel overwhelmed – especially if you feel there is no real way to pay back the money you owe. However, with a few careful tweaks to the way you manage your finances and some savvy reallocation of your credit, you can turn the tide on your debt and reclaim control of your financial life.
On that note, here are six tips to help you do just that.
1. Avoid furthering your debt
First, if you want to get rid of your debt, you need to stop adding to it. While this may seem like a fairly obvious point, it’s worth reiterating since this is where most people tend to fail. After all, your current spending habits are probably what got you here in the first place, so if you want to change your circumstances, you will need to change the way you finance your lifestyle.
Granted, while spiraling interest rates and fees on late payments make it hard to regain control of your finances, you simply have to find a way to put a plug on your debt, and this usually means spending less than you bring in. To do that, you’ll need a budget.
2. Create a budget
To stop the reliance on loans and credit cards you need to write out an in-depth budget that lists all of your income and expenses. That way, you will get a birds-eye-view of your finances which can help to underline problem areas with your spending, such as where you are being too frivolous with your money.
As they say, a penny saved is a penny earned, so look for ways to cut back on unnecessary spending. This will help to rebalance your finances and hopefully give you some room to maneuver so you can start paying off your debt. First of all, look to cancel any subscription services you no longer use (or do not need).
These expenses can be directly allocated to your debt instead, helping to clear it faster. Many budgeting experts recommend the 50/30/20 rule when it comes to budgeting, which offers a simple way to allocate your income and minimize expenses. So it’s worth exploring that avenue to see if it works for you.
3. Start with the highest interest first
When it comes to paying your debt, you need to carefully consider the optimal repayment strategy. In general, the best tactic most experts recommend is to tackle the most expensive debt first – which is the one with the highest interest rate.
While doing so, you should switch to minimum payments on all of your other loans and credit cards while you devote all of your additional funds to paying off the highest interest credit you have. Once you’ve cleared your first debt, you can move on to the next most expensive bill, repeating the process until you’re left with your least costly debt to pay off last.
Conversely, there is a different approach that you could take called the snowball method. This focuses on paying the smallest debt first. This helps to keep your motivation levels high as you can quickly whittle away at your list of creditors, giving you a sense that you are making real progress.
However, this is not the quickest way to repay your debt, and it can lead to a higher overall interest payment.
4. Pay more than the minimum balance
On your credit cards, overdraft, loans, or any other lines of credit, make sure you always pay more than the minimum amount. If you don’t, it can take an eternity to pay off your total debt since the bulk of your minimum payments will be used to pay interest costs rather than to reduce the amount you owe.
As such, you should try to pay as much as you can afford towards your debts if you want to clear them quickly. Even a monthly increase of $50 will help.
5. Increase your income
If you want to tackle your debt aggressively, then you should consider looking for new ways to increase your income. Sometimes, it can be difficult to attribute more of your budget towards debt payments, especially if your finances are tight and you don’t have a disposable income left after you factor in all of your essentials.
Whether it be a side hustle, a second job, or simply selling your unwanted items, supplementing your income and increasing your debt payments is one of the fastest ways to rid yourself of debt.
6. Consider a debt consolidation loan
Debt consolidation loans are a great way to take control of your finances as they simplify all of your debts into one, easy-to-manage payment. If you have multiple lines of credit, such as loans, credit cards, and overdrafts (all to different providers), then it can be hard to keep track of your payment obligations, which can easily lead to the mismanagement of your debt.
To make your life easier, debt consolidation loans streamline your finances since they allow you to pay off all of your existing creditors with one big loan. Then all you have to do is focus on maintaining a relationship with one creditor through a single monthly payment. In addition to this, consolidation loans give you a clear date for when your debt will be cleared, which provides great peace of mind in knowing that there is light at the end of the tunnel.
If you have a significant amount of debt, it can be overwhelming to even begin considering a way to get it cleared. However, through establishing an honest budget and following a repayment strategy, you can begin to tackle your debts head-on and start chipping away at the total amount owed.
Remember, the first and most important step is to stop your current reliance on credit – only then can you start contemplating the best strategy to turn your situation around.