Obtaining a loan of any kind shouldn’t be a life-or-death situation. Some people just need the extra money to pay their bills for the month, but a loan can put you into financial ruin if you’re not properly prepared to pay it off. So where does that leave you?
Having a lot of debt doesn’t mean that you’re not a responsible spender. What’s more important is that you have a plan set up to deal with your debts so that they don’t turn into mountains you can’t deal with. So instead of burying your head in the sand, here are some essential steps you can take to start getting out from under your debts.
Before You Pay
Before you can come up with a plan to start tackling your debts, there are some things you should have in place. First, you should have a tax-advantaged account if you have a high deductible health plan; that way, you can pay for your medical bills with pre-tax money. Secondly, you should have a retirement savings plan that matches how much your employer puts in each month. Lastly, have some cash set aside for emergencies so that you don’t have to scramble to make ends meet when an emergency does arise.
Evaluating your Finances
The best way to figure out how to get yourself out of financial trouble is to take a look at your finances. Look at your overall debt and compare them to your income. Set aside some money each month that you have to pay for your basics, such as rent and bills. Then you’re going to have to use what’s left over to settle the rest of your debts.
Next, you’ll want to set a budget for yourself. This gives you set guidelines on how much money you’re spending each month so that you can better handle your debts. Stick to it like glue and don’t stray from it too much or you could end up throwing your finances out of whack again.
Freeing Up Some Money
After taking a look at your finances, consider what you can cut out of your life for the month. Do you take a lot of trips to the coffee shop or eat out a lot? You can cut out these small treats, cancel your cable television, and forget about your gym membership until you’re financially stable again.
You could also add to your monthly income by taking up some extra seasonal or temporary work to help you pay off your debts. Just don’t let it consume the time you need to dedicate to your primary source of income, and don’t jeopardize your health either, physical and mental.
Deciding How You Want to Pay Your Debts
There are different strategies that you can use to pay off your debts, and they each work differently for different people, depending on their financial situations.
- Avalanche method: this method involves paying off the balances of the highest interest rates first. This way, you’re getting rid of your debt quickly and efficiently by paying more than the minimum. High interest rates of a long period of time end up costing more than the loan itself, so getting rid of them quickly actually reduces how much interest you’re paying per year.
Once the highest are taken care of, work your way down the ladder until you get to the debts with the lowest interest rates. This is the method that is used throughout the rest of this article.
- Snowball method: this goes in the opposite direction; you pay off the loans with the smallest balances first and work your way up to the bigger ones. By getting rid of the smaller ones as quickly as possible, you’ll have more money each month to dedicate to the larger debts that you have. This method can give you some confidence in paying off your debts as you slowly watch each one getting wiped away.
- Blizzard method: this is a combination of the first two methods by paying off the smallest balance first and then working your way down from the debts with the highest interest rates. That way, you can get the satisfaction of saving money while also watching your debts being erased one by one.
It would be best to talk to a financial advisor to see which method works best for your situation before you jump headfirst into using one. They’ll be able to help you sort out how much to put into each debt each month without going into financial ruin.You may also want to check out the government regulations on debts so that you know your rights and what is available to you.
Paying Off Secured Debts
Secured debts are loans that have been secured by an asset as collateral, such as a home or a car. Pay at least the minimum payments if not more to stay on top of them. Failure to make these payments on time can lead to the asset being taken to settle the amount of debt that’s left over, which you may not be interested in losing.
Paying Off Credit Cards
Assemble all of your debts together and categorize them. The first thing you should start throwing your money at is high-interest credit card balances. It can pretty easy to run up credit cards when you’re not constantly looking at how much money you have left in your wallet. Minimum payments on these cards are typically pretty low, which means that you’re paying mostly interest. The best way to get rid of these debts fast is to pay more than the minimum each month.
Once they’re paid off, refrain from using them as much as possible so that you don’t end the month with another monumental bill to pay.
Another option is to transfer the balance on your credit cards into a single credit card that you can pay off over time. A balance transfer card may allow you to pay no interest on your balance for a certain period of time, making it a very attractive option if you want to pay your debts off quickly. Talk this option over with your bank to see if it’s a viable option for your situation.
Private Student Loans
The next thing you should start paying off are your student loans. They carry very large interest rates, especially private ones for college. See if you can deduct the interest on a student loan, but you may only be able to deduct about $2500 per year if you fall within the income bracket of making less than $85,000 per year. Any more than that, and you can’t deduct them from your taxes. Look a little more into reviewing this loan lender so that you can figure out how to better tackle taking care of your debts.
Paying off Government Loans, Car Loans, and Mortgages
This is the next thing you should start throwing your money towards, as these loans tend to have the lower interest rates. This means that you can make the minimum payments on them and not jeopardize the health of your bank account. These kinds of loans are also deductible for tax purposes, so that you’ll end up saving money annually.
In the event that you have any federal student loans, you may be able to qualify for a repayment plan or a loan forgiveness plan. If not, you may be able to refinance your loan so that you’re paying less each month.
Ask For Help
If after all of this, you still feel like you’re floundering, swallow your pride and ask for help. Financial advisors, credit counseling agencies, and experts are all there to help you to manage your financial problems, no matter how deep you’ve found yourself. It’s not an easy situation for anyone to get themselves out of and it doesn’t hurt to have someone on your side to help you through these difficult times. Go to your bank to see if they can recommend someone to help you.
Develop Better Financial Habits
At the end of it all, you should have learned a lesson from all of this and that’s to practice better spending habits. It may feel good to breathe easy now that your debts are no longer in the way, but don’t fall into the trap of treating yourself to a job well done with something expensive.
Instead, start focusing on your financial needs each month and making them manageable. That way, you can have money saved up in the future to get those “wants” you’ve been yearning for. It also wouldn’t be a bad idea to adhere to that budget you created so that your finances can remain in the black.
Paying off your debts doesn’t have to feel like an uphill battle for the rest of your life. Getting everything under control is going to take some time, but with patience and persistence, you’ll come through on the other side, debt-free.