Most Americans carry a high debt load. And while we like to think of it as “good debt”, the truth is, if it keeps you from achieving your goals, it’s probably not all that good. Most debt falls under consumer debt, which would include your credit cards, store credit, car loans, boats, etc. Your house payment usually falls under a different category because it’s an asset that can be sold. Additionally, it usually gains in value unless you bought in a bubble. With that said, most people think they need to have debt until they die and nothing could be further from the truth. Getting out of debt takes a plan, and here are some tips to help you get there and stay there.
Start an Emergency Savings Account
Before you go full throttle to tackle your credit cards, you need some sort of emergency fund or savings account. Some experts recommend starting at $1,000 as a minimum, but you could carry as much as $5,000 or more in your emergency fund. It depends on the types of emergencies you expect, whether it’s car trouble, medical needs, last-minute airline tickets, etc. Emergencies happen and it’s best to have a plan—and finances—for when it happens.
Plan For Medical Emergencies
One medical emergency can put you into debt for a long time. This is especially true if you have a high deductible plan with a lot of restrictions. Use your company’s HSA and FSA to set aside money from every paycheck tax free. Additionally, pay for medical tests out of pocket through affordable health screening companies where the pricing is transparent. There is nothing worse than finding out the cost after the test is done.
List Your Debts
Here’s the hard part. You’re going to need to know exactly how much debt you have. Don’t hold back. List it all, even if you think it’s “good”. You want to list who holds the debt, what the payoff balance of the debt is, and what the interest rate is. List them all. Then create two lists from that. One list can be a list that orders the debts from largest to smallest, regardless of the interest rates. The other list can be ordered based on the lowest interest rate to the highest.
These lists help you decide how you want to tackle paying them off. Some experts recommend starting with the lowest balance first so you can gain momentum. Once you pay off a couple of small debts, they theorize you’ll be more likely to stay committed to paying off your debts. The other method is based on math. Pay off the high interest debts first, and you’ll spend less in the long run.
Create a Budget
Whether you create a weekly or a monthly budget, it’s important to plan your spending. A budget helps you prioritize the money you have coming in and to set aside enough to pay your bills and necessities and to pay off your debts. A working budget helps you see how much you’re spending in each category and to make adjustments as needed. There are countless budget templates online to help you get started.
Stop Accumulating More Debt
Getting rid of personal debt is challenging, but one of the ways you can help yourself is to stop accumulating more debt. Don’t use the credit cards anymore, stop adding more to the pile. If you’re already struggling under the weight of debt, getting more won’t help. This is where an emergency fund and a good working budget really help. They give you the tools you need for true financial emergencies, so you don’t have to get into more debt. The emergency fund is there so you don’t need the credit cards anymore when something urgent comes up.
Ask For Lower Interest Rates
Call all your debts to see if they can offer lower interest rates. You could also consider a consolidation loan to help lower those rates. The trick here is to close out all the accounts that you consolidate instead of keeping them open. You’ll get yourself into trouble financially if you choose to continue using those accounts after you consolidate them into a different loan. Lower interest rates can help you with lower payments or getting the benefit of helping your current payment amount go further. Creating these habits are important to helping you stay out of debt long-term.