Having debt nowadays is quite common whether it is for a mortgage, business debt or any other kind of loan. Without debt, life seems impossible, but in the long run, if we see the effects of debt, it is quite negative. That is why you need to plan your finances in such a way that you are able to get rid of debt.
If you do not pay back your debt on time, it can diminish or reduce your credit score which will further create hindrances for you to getting more debt. If you are also facing such a situation then fret not because we have got you the perfect solution. By following these 9 strategies, you will be able to get rid of your debt faster and attain financial freedom. Without any further delay, let’s get started.
Types of debt Americans take
The term getting rid of debt doesn’t mean that you pay back the entire debt fastly, it means that you get rid of the higher interest rate debt and eventually reduce it. There are various types of debts that Americans take up such as mentioned below.
Business loans, personal loans, mortgage loans, auto loans, student loans, line of credit, home equity and more. Each of these loans has a different payment length, due date and interest rate. As a result, it becomes confusing as to which to pay back first.
Understanding your debt
The first step to pay back your debt is to understand where you stand financially at the present time. For that, you will have to calculate your net worth. It will help you understand what are your assets and liabilities.
You can also use online tools for calculating your net worth. You can also use an Excel sheet to do so. All you have to do is list your debt type and include what assets you have and what are your debts and their interest rate.
Have a tab on your expenditures
This is the second step to paying back your debt faster. Now that you know how much you owe, you have to make sure that you have enough money to pay that back. And the best way to have enough money is to increase your income or limit your spending.
You can also create a budget for yourself to keep track of your expenses. Budgeting plays a key role in paying back debt faster because it stops you from overspending. You can allot a specific budget to your needs. For example, you can set a budget for groceries, electricity, or cables. And decide to not overspend that amount.
Make a list of your wants and needs
Food, rent and utilities come under the tab of your needs. While going out, buying some new gadgets, and incurring expenses on entertainment are the wants. If you want to go on a vacation or buy a new car or a house, it comes under the type of wish.
Make sure that you have separated your needs and wants. Based on these allot your money. Buying a new house and going out to a movie can wait, but buying food or paying your rent cannot wait. So you must learn to prioritize which thing you want to spend money on and which you can delay.
Focus on long-term targets
When we say long-term target, it means your goals for the coming 5 years. While it is necessary to have short-term goals, which can be around 6 to 12 months, it is necessary that you have a long-term vision.
For this, you can make a list of what are your goals for this coming year and can expand it to the coming 5 years. It can be anything like having enough financial security to pay back your car loan and have a comfortable lifestyle, or it can be starting your new business.
Once you have your goals clear it will give you a good idea of how much money you will need and what is the current situation and based on that you will be able to calculate whether you can take back your debt.
Try to increase your earnings
As said earlier to pay back your debt, you will need to have more money and to have more money, you have to increase your income. You can do that by finding new sources of income and doing a side hustle. For example, if you are already doing a 9 to 5 job then you can start doing something on the side after you come home.
It can be doing paid surveys, affiliate marketing, blogging, photography, teaching online, or babysitting. It can be anything through which you can create passive income. If you combine this with reducing your expenses, you will be able to save more money and pay back your debt fast.
Use the debt avalanche method
This is one of the best ways to get rid of your debt. This method means that you pay back the debt having the highest interest rate first followed by paying back loans with lower interest rates. Here you pay back that with the higher interest rate and for the rest of the debts, you just pay the minimum amount.
In this way, once you have completed the payment having the highest interest, you will have more money to pay back the rest. For example, you have two debts – the first one is a car loan with an interest of 10% and another one is a personal loan having an 8% interest rate.
You pay back the car loan first and for the time being, just pay the minimum amount for your personal loan. Higher interest makes the hole in your pocket bigger and thus once you get rid of it, you will have more money saved.
The snowball method of paying debt
In the above method, you pay back the debt with the highest interest rate. On the contrary, for the snowball method, you pay back a lower amount of debt first. For example, you have two debts amounting to $1000 and $500. You focus on paying the smaller amount first and then go ahead with the higher amount.
If you find it hard to pay back debt and are looking for motivation, this is the method for you. As you pay back the small amount of debt, you will gain confidence that you can do it. It is more about the mindset of paying back more than the amount or interest rate here.
The balance transfer technique
There are various techniques available for paying back debt faster such as balance transfer with 0% interest. You can transfer all your debt to a credit card having zero interest rate in this method. You will have a time frame of 6 to 12 months to pay back this debt. Though one thing with this method is that you will have to pay a balance transfer fee and if you fail to pay back debt within the time frame, you may have to pay a higher interest rate later.
Using debt consolidation
This is one of the methods through which you can simplify paying back your debt. Here you combine all debts into one and make a single monthly payment. It will help you pay back your debt faster and will ease your monthly installment.
As you have consolidated your debts, your interests will be consolidated as well. If you have a low credit score, you still have to pay a higher interest rate. There are cons to everything and it’s on you which method you want to choose. So, make your decisions wisely.