The vast majority of people are looking for ways to get out of debt, but are not quite sure of how best to do it or where to get started. The reality is there isn’t a single “best way” to get out of debt that works for everyone. So, here are some tips for managing debt problems to get you started.
Pay an Amount Greater Than Minimum
Be sure to pay more than the minimum payments on your line of credit, overdraft, or credit cards. If you just make the minimum card payments every month, it will take a really long time to completely pay off your balance. The reason for this is that most of the minimum payments go towards the payment of interest as opposed to reducing the amount you owe (principal).
If you would like to quickly pay off your balance, pay as much extra as you are able to afford. Even an additional $50 every month will go a long way. You can also try using a financial calculator to find out how much you can save this way.
Spend Less Than Your Planned Expenditure
The vast majority of people have wants and needs that are greater than their pay. You might have heard the old saying, “You can have just about anything you want; you just cannot afford everything that you want.” People often fall into the debt trap since they tend to buy what they want, when they want. Not even millionaires are able to afford to buy everything that they want.
If you would like to buy something, avoid actually buying it until you have the money. If you are satisfied with less than you would ideally want, even temporarily, you can use the savings to pay down your debt. By the time you have finished paying off the debt, you will probably have already adjusted to your new priorities and you can use the money saved to put towards other financial priorities.
Paying with cash rather than credit is another way to spend less. McDonald’s has found that people spend 56 percent more at its restaurants when they pay with credit as opposed to when they pay cash. Studies have shown that people spend 100 percent more at vending machines or on event tickets when they use credit.
Overall, studies appear to show that people usually spend at least 15 percent or more on everything they buy using credit. If that concept is applied to average Canadian households that currently buy everything using credit cards to either get cash back or collect points, they would probably save over $3,000 annually if they only bought items with cash instead. After all, the cash back or points would only amount to $400 in value at best.
While your savings might not be as great as the example above, the point is rather clear. If you would get out of debt, leave your credit cards at home and use cash instead. Furthermore, avoid buying things with credit until you have managed to pay down your debt to the level that you are targeting.
Pay Off the Most Expensive Debts First
Making minimum payments on all your debts and credit cards is one of the smartest strategies to get out of debt except for one. Identify the one debt that’s charging you the highest interest rate and focus all your extra payments on paying it off first.
Once you have finished paying off your first most expensive debt, take all the money that you were paying on that debt and focus it all on the next most expensive debt. Keep up with this approach as you pay down all of your debts, and soon you will be let with your least expensive debt to pay down last.
The strategy described above can help you quickly get out of debt and you will feel encouraged as you see your progress. A different variation of this strategy is also available that many people find more motivating. It is known as the Snowball Method. You can check it out to find out whether it could work better in your situation.
Buy a Quality Used Vehicle Than a New One
Dave Ramsey, a popular personal finance radio host once revealed that a new car worth $28,000 loses about $17,000 of its value within the first 4 years of owning it. To get a similar result, you could toss out a $100 bill out the car window once every week.
The lesson here is that you can save thousands of dollars by buying a quality used vehicle as opposed to a new one. The money saved can help you get out of dent faster. You can find a quality used vehicle by going to your local library and looking in the Consumer Reports or Phil Edmonston’s Lemon-Aid books.
If you decide to purchase a new vehicle, Consumer Reports always recommends choosing a reliable vehicle with good fuel economy and preferably keep it for 15 years. Tis will stretch your dollars the furthest and keep you out of debt since you will have enough time to save up for a new vehicle.
Consider Becoming a Single-Vehicle Household
If your family has multiple vehicles, consider getting rid of all but one and carpool, take transit, or walk to work. If you use just one vehicle, you can literally save thousands of dollars. The average vehicle owner spends more than $9,000 annually to own and operate their vehicle. If that money is used for paying down debt, it can make a significant difference.
Instead of going cold turkey and selling your other vehicles right away, try first test driving this idea. Parking your vehicle for a while, drop the insurance down to pleasure use only and see whether carpooling, cycling, walking or taking transit works for you.
If you end up deciding to sell your second vehicle, even the rental car or odd taxi trip will not amount to nearly as much it would to keep your second vehicle permanently. If there’s any chance that transit could work for you, this option alone is usually 80 percent cheaper than owning and operating a vehicle. If you still have serious issues ask yourself – Am I eligible for a Debt Management Plan?
Save on Groceries and Pay Off Your Debts Faster
If you would like to save some money to pay off your debt faster, you can consider stocking up on groceries whenever they are on sale, or going a step further and stockpiling them when they are on sale and then skipping one grocery store trip every month and subsequently living off the stockpiled food. You have the option of stockpiling non-perishable groceries such as cereal, canned goods, as well as things you can freeze such as meat and bread.
If you fill up your cupboard, pantry, and refrigerator when groceries are on sale and skipping one trip to the grocery store each month, you can end up saving up to 25 percent on your yearly grocery bill. A family of 4 could possibly save anywhere from $2,300 to $2,900 annually by doing this. If you apply such kinds of savings to your debts will definitely put you ahead in the long run.
Integral to the success of this strategy is being on the lookout for sales, stocking up only when groceries are on sale and freezing the foods properly. When you “skip” a trip to the grocery store, however, you will still have to buy perishables such as fruit, vegetables, and milk, but hopefully you can skip the rest of what you would typically buy.
If you are unable to skip at least one trip to the grocery store each month, you should try skipping a trip to the grocery store at least once every other month. That way, you can still save a fair amount of money annually.
Get Another Job and Pay Down Debt Aggressively
A common way for people to pay down their debt is to get a second job and picking up an extra shift or two. While this strategy for getting out of debt will not necessarily work for everybody, if you can actually manage to get it to work, it is possible to become debt-free within just a few short years.
For the strategy to work, however, you must apply all of your extra income to the repayment of debt. Working the extra hours or shifts also does not have to be permanent. You always have the option of scaling back again once you have paid off your debts.
You can also generate some extra income for paying down your debt by making the most of a hobby that you enjoy or a skill that you possess. For instance, if you happen to be a great writer, you may consider freelancing articles for newspapers, blogs, media outlets, or even a freelance website.
If you are crafty, you may consider selling your creations on platforms such as Etsy. If you are a handyman, see whether you can pick up some extra jobs. You can actually find websites that help you connect you with people that need your skills.
You may even consider using your home to generate some extra cash. Is it possible for you to rent out your basement, rent out the storage space in your garage, rent a room if your house (perhaps you could consider using Airbnb for this), or can you take in a student to earn some extra income?