If you find yourself going deeper and deeper into a debt trap with no foreseeable solution, think again! We are here with just the tips to ensure that you are able to get out of debt faster than the pace at which you were going. Bear in mind that once you have decided to seriously take control of your debts, making the same possible requires unbridled financial commitment and discipline. Making a few fundamental changes to your lifestyle can ensure getting out of debt faster with the same income level.
This practice obviously gets easier over time as you begin to develop better spending habits. Don’t put this off anymore—the sooner you start, the easier it will be to take back control of the situation.
Say Goodbye to Borrowing for a While
There is no way that one can get out of debt by borrowing more money. This means completely halting habits like swiping credit cards for your lifestyle needs or availing of new loans. Focus instead on curtailing expenses so you have more of your income on your hands. Consider the true cost of swiping a credit card and taking out new loans.
Live on the cash on your hands as a key change you introduce in your financial management habits. In the early stages of your debt management plan, new credit for the purpose of debt consolidation is not effective. Understand the size of your debts put together and whether or not it is in a position where a bigger loan can help close all outstanding accounts before you opt for one.
Try the Tested Debt Snowball Method
Implementing a solid debt payoff strategy is an absolute imperative in the process. The first thing to do is to come up with a plan that maximizes your payoff schedule. A proven way to get out of debt fast is using the debt snowball approach. In this, you direct most of your debt-related funds toward only one of your debts, which will then be receiving a higher repayment amount and be paid off faster. Once that debt is paid off, you reallocate these funds toward another debt and repeat this process until all debts are repaid in full.
As a result, the extra funds snowball, even as the money you are allocating towards repayment stays the same. For example, if you have dedicated 20% of your monthly income to paying off debts, the absolute number for which comes to ₹300 from your income, and have three ongoing debts, you would be paying ₹50 to one, ₹50 to another, and ₹200 to the third. Once the third is paid off, you’ll pay ₹50 to one and ₹250 to the other.
To make the process most effective, the total amount you direct toward repaying debts should remain consistent. If you have been putting ₹300 toward debts each month, and one of your debts is paid off, you must still continue to put ₹300 toward debts in the following months. If you are trying to choose which debt should be paid off first, always go for the one with the highest interest rate, but it is also subject to your situation.
Pay More Than the Minimum Payment
One of the simplest ways to get out of debt fast is by reducing expenses and incrementally multiplying the money you are putting toward repayment. You should try to put as much of the funds available to you as you can toward debts every month. Higher-than-average-sized payments will accelerate the process of you becoming debt-free quickly. While creating a budget to get out of debt effectively, set a minimum amount, preferably 20% of your income, toward repayment. Make it a rule to pay more than the minimum amount due toward each of your debts.
Consider Transferring Balance and Consolidating Debt
If too many debt payments are leaving you cash-strapped, you may look at a balance transfer or consolidation of debt. While the same may sound like a good idea, clubbing the balances of multiple credit accounts without the stringent combination of budgeting, lifestyle changes, and on-time payments can leave you finding yourself deeper in debt than when you started off. You must also consider the need to avoid replacing good debts with bad debts.
To simplify matters for you, here’s an example: A good debt is a mortgage loan, which basically helps you keep a roof over your head when you need liquidity for other purposes. A bad debt is when you are financing discretionary expenses with a credit card. They also come with high-interest rates.
Renegotiate Credit Card Debt
Considering that debt management is your only priority, renegotiating your credit card bill also comes in as an option. This will give you the option to pay a lump sum amount of your bill instead of costly monthly payments. This is known as debt settlement. Going through this process is also not difficult, because all you have to do is call your creditors or lenders and request a lower interest rate on your credit cards.
If you have a positive repayment history, your request may be considered. You can also negotiate credit card fees and work with your creditor to come up with a new interest rate or waiver on part of the fees or recurring charges you face. Most of these companies are eager to keep your business and will probably readily help you out.
Seek Help Where It Is Necessary
Sometimes the situation may be so far gone that you may be required to seek professional help to become more financially savvy and reduce your tendencies and need to incur debts. The one thing to understand is that increasing your income is not necessarily the way to stay out of debt. A lot of high-income individuals stay mired in debt. All that matters is aligning your spending habits to match your lifestyle. You do not need to shoulder the burden alone—a qualified financial coach can help you set up just the right repayment plan to get out of debt at the earliest.
Understanding Your Debt: A Crucial First Step
Before embarking on any debt repayment strategy, it’s crucial to fully understand your financial situation. The first step in getting out of debt fast is to take stock of what you owe. Create a comprehensive list of all your debts, including credit cards, loans, mortgages, and any other financial obligations you may have.
Organize Your Debts:
- List each debt: Write down the total amount owed for each debt, along with the interest rate and the monthly payment due.
- Prioritize high-interest debts: Start with the debts that have the highest interest rates, as these are costing you the most money over time.
- Assess monthly payments: Determine how much of your income is going toward servicing these debts. This will give you a clear idea of how much room you have to make extra payments.
Having a clear overview of your debt will help you determine the best course of action for repayment and ensure you stay on track as you work to become debt-free.
Create a Realistic Budget to Control Spending
A budget is the backbone of any successful debt repayment plan. Without a clear understanding of where your money is going, it’s easy to continue to overspend and accumulate more debt. A budget will help you allocate funds toward repaying debts while also covering your basic living expenses.
Steps to Create an Effective Budget:
- Track your income: Begin by documenting all sources of income, including your salary, side gigs, investments, etc.
- List all expenses: Write down your monthly expenses, including rent, utilities, groceries, insurance, transportation, and any other essential expenses.
- Categorize discretionary spending: Identify areas where you can cut back, such as dining out, entertainment, subscriptions, and impulse purchases.
- Allocate extra funds to debt repayment: Once you’ve trimmed your discretionary expenses, use the additional funds to pay off your debt. As mentioned earlier, aim to pay more than the minimum required payments.
One of the most powerful ways to ensure you stick to your budget is by automating your payments. Set up automatic transfers for debt payments and essential bills to eliminate the temptation of spending money elsewhere.
Emergency Fund: Why You Need One Even While Paying Off Debt
Many people make the mistake of focusing entirely on debt repayment without considering the importance of an emergency fund. Having a small emergency fund can help prevent you from falling back into debt in case of unexpected expenses.
How to build an emergency fund while paying off debt:
- Start small: Aim to save at least ₹10,000 to ₹15,000 for emergencies. This will prevent you from relying on credit cards when unexpected expenses arise.
- Allocate a percentage of your budget: Consider putting aside a small percentage of your income each month toward your emergency fund while still making progress on your debt.
- Keep the fund separate: Keep your emergency fund in a separate savings account to ensure you don’t dip into it unless absolutely necessary.
While it may feel tempting to throw all your extra money toward your debts, having a buffer can ensure that you stay on track without falling into further financial difficulty.
Avoid Lifestyle Inflation: The Key to Staying Debt-Free
Once you start making progress toward getting out of debt, it’s easy to fall into the trap of lifestyle inflation. This occurs when an increase in income leads to an increase in spending. If you don’t watch your spending, you may find yourself right back in debt despite earning more.
How to avoid lifestyle inflation:
- Increase savings as your income increases: When you receive a raise or bonus, increase the amount you are saving or allocating toward debt repayment, rather than spending it on luxuries.
- Reevaluate your needs versus wants: Be mindful of unnecessary purchases. Opt for delayed gratification instead of splurging on things that aren’t essential.
- Set new financial goals: As you pay down your debts, set new goals, such as saving for retirement or building an investment portfolio. This can keep you motivated and help you avoid slipping back into old spending habits.
By keeping your expenses in check and staying focused on your financial goals, you can avoid the cycle of overspending and ensure you stay debt-free.
Tackle Multiple Debts with the Debt Avalanche Method
While the debt snowball method is a popular strategy, the debt avalanche method may be a more efficient way to reduce your debt faster. The debt avalanche involves paying off the debt with the highest interest rate first, which minimizes the total amount you pay in interest over time.
How to implement the debt avalanche method:
- List all your debts by interest rate: Identify the debt with the highest interest rate and focus on paying it off first. For example, if you have credit cards with interest rates of 18%, 22%, and 15%, prioritize the card with 22%.
- Pay the minimum on all other debts: While you focus on the highest-interest debt, continue to make minimum payments on all your other debts.
- Reallocate funds after each debt is paid off: Once the highest-interest debt is cleared, move the funds you were allocating toward it to the next highest-interest debt.
The key benefit of the debt avalanche method is that you save money on interest payments, which can speed up the repayment process and free you from debt quicker.
Conclusion: You Can Get Out of Debt Faster Than You Think
Getting out of debt requires commitment, discipline, and a solid plan, but it is entirely achievable. Whether you use strategies like the debt snowball or debt avalanche method, refinance loans, or seek help from credit counselors, the key is to stay focused on your goal of becoming debt-free.
While the process may seem daunting at first, remember that every step you take toward paying off your debt is a step toward financial freedom. The sooner you start, the faster you’ll get to a place where you no longer have to worry about debt.
Keep a positive mindset, stay disciplined with your spending, and seek professional advice when needed. You’ve got this!