STEP 1 FACE THE TRUTH
Be honest about your finances. So often we end up in debt by ignoring bills, pretending that next month’s pay will cover what’s coming in… you know the tricks. If you are serious about getting out of debt the first step is to drop the excuses and the lies and to discover what your financial situation really is.
Make a clear list of all your set debts (such as credit cards and personal loans), your bills (work with the highest bill for the year as your guide) and any savings or investments you have.
Look at the numbers and understand exactly the situation you are in. Is this supposed to cause you to panic? No. Getting out of debt is not as difficult as it seems but you will never do it if you keep lying to yourself.
STEP 2 COMMIT TO FIXING THE PROBLEM
Like any of life’s little discomforts, you have to be committed to moving on. Getting out of debt is much like losing weight there will be a diet, there will be exercise and you will have restrictions on your freedom. I also promise that you can’t fail if you stick to it. Are you ready to be debt-free or are you still hoping that you will win the lotto and never had to deal with it? If you are not willing to make sacrifices for as long as it takes to pay of your debt, then you are not serious about becoming debt-free.
STEP 3 CONSOLIDATE YOUR DEBTS
The financial sense behind this is that a single loan for all debts (particularly if you shift credit card debts into a personal loan) usually reduces the cost of servicing the loan. The psychological win that accompanies this is that your finances are no longer in a mess or confusing you have one loan that you are paying off. It makes budgeting much easier and keeps you from becoming confused about where your money is or where it is needed.
STEP 4 WRITE A REALISTIC BUDGET
Work out how much you need to live on. Again, the more honest you are the more likely you will be to succeed in becoming debt free. Once you have created a detailed list of your expenses review it carefully looking for the following –
i. Any items that are not necessities.
The longer you persist in keeping luxuries and “nice-to-haves” on your list of necessities, the longer you will be in debt. A need is something you cannot live without. Be particularly careful of saying that it is a need “in this day and age”. I can promise you that it is possible, and not even particularly inconvenient to live without a mobile phone.
ii. Any items which can be reduced by simple changes in habits.
Could you reduce the cost of household cleaning products by buying bulk? Or your electricity bill by unplugging standby appliances when they are not in use?
iii. Any items that might have a cheaper alternative if you switched companies or bundled your services with one company.
Check telephone and internet services, electricity, insurance, etc.
iv. Any items that can be purchased with coupons or loyalty discounts.
Now with the new, tighter living expenses and your action plan for keeping them low, look at how much income you have left to service your debt.
If you are not in too much trouble, your budget will put you in a position to repay your debt and you will have an idea of how long it will take. If your new budget shows you that you are falling short on money to make regular repayments then you need to contact billing companies and your loan provider and work out a payment plan. All organizations have a structure in place to assist customers in financial trouble they would prefer to get your money in reduced installments than not at all.
Once you know that you can achieve your goal of being debt-free on your current income, it is a great time to start thinking about how to increase your income. This might be taking on a second job, selling all your unwanted items on Ebay, or convincing your boss to give you a raise. Put your increased income directly into your debt repayments and decrease the length of your repayment program.
STEP 5 COMPLETE YOUR PAYMENT PROGRAM
Depending how deep in debt you are, your repayment program could be a few months or many years. Sticking to it won’t always be easy but it will be worth it. Once your debt is paid you will have learned new, financially sound habits. Keep these and your debt repayment plan will transform into a savings and investment plan!