One of the best things you can do for yourself is to get out of debt. In addition to feeling greater freedom without a constant financial burden hanging over your head, you also have the freedom to buy some things you’ve always wanted. Getting out of debt isn’t always easy, but it gets even harder when you make the following mistakes.
Pay off the debt with the highest interest rate first
If you want to get out of debt fast, you need to invest your money where it will reduce your debt the fastest. Paying off your largest debt first may not be the best way to reduce your debt quickly. Instead, put extra money on the debt with the highest interest rate. Debt with low interest rates – like your mortgage – is considered “safe” debt.
Credit cards often have notoriously high interest rates. This is probably where your interest is growing fastest, and if you pay it back — or at least reduce it quickly — the interest you owe each month will slow down. If you only pay the minimum amount due, financial advisor Suze Orman says you could easily end up paying up to four times as much for your purchases.
Eliminate payday loans quickly
One type of debt you want to avoid entirely or pay off as soon as possible is a payday loan – if you have one. Payday loan interest rates are ridiculously high — possibly as high as 400 percent — and worse if you miss a payment.
Payday loans can make you dependent on them – especially if you don’t have good spending habits. Learning to control your spending can help you overcome your addiction to not having enough cash each month.
Setting up a budget can show where your money goes each month and what you still have to spend in each category. After you’ve spent the money in a particular category – like food, entertainment, gas, etc. – don’t take it from other categories unless absolutely necessary.
Focus on getting rid of debt first
Instead of trying to pay off all your debts on top of that, Fool.com guesses They focus on betting more on one debt at a time. Of course, you still have to pay the minimum amount for all your bills. After paying off one debt, you have more money for the next bill. You will be encouraged when each bill is paid, allowing you to move on and reduce all your debt.
Continue to spend in the same way
If you don’t change how you spend money, you’ll stay in debt. Setting a budget will help, but if you don’t stick to it, you’ll never be out of debt. Once a credit card is paid off, don’t charge it again. Pay only with cash until your debt is under control.
Not using debt consolidation options
If you have multiple debts to pay off, and some of them have a high interest rate, there are two options to consider:
- A credit card with balance transfer
If your credit is still good and you don’t have a lot of debt, getting a new balance transfer credit card can help. These credit cards may be the best way to get out of credit card debt because they allow you to transfer other credit card debt to the new card and give you 12 to 18 months without being charged interest.
While it doesn’t eliminate debt, it has the benefit of allowing you to pay down your debt faster during the interest-free period — and it also allows you to make a payment every month. You won’t pay any interest during the introductory period – but you need to make sure you don’t miss a payment during that time – or your interest rate could go up to 29 percent or more.
- A debt consolidation loan
You can also take out a personal loan to reduce your debt. Rocket Loans says that all your debts can be paid off with this type of loan and you only have to make one monthly payment. Getting a loan with an interest rate lower than the interest rate on your current debt can be of great value to you. Do not put any debt with a lower interest rate under this loan.
No reduction of additional expenses
You can get out of debt faster if you know where your money is going each month. Eliminate unnecessary expenses and adopt a tight budget. Set aside a little money for some simple pleasures (your kids will appreciate it, too) because if you make it too tight, you’ll soon want to drop the strict budget.
Don’t increase your income
If you can take a part-time job or supplement your income in any way, says Forbes It can help you get out of debt fast. A temporary job also helps to reduce your debts more quickly. At the same time, make sure you create a budget and stick to it so that the extra money goes towards paying down your debt — rather than buying new things. Bringing in a little more money each month can also help you avoid debt later on.
Don’t have an emergency fund
Although an emergency fund won’t help pay off your debt, it can allow you to remain debt-free when the need for immediate cash increases. If you set aside enough cash to cover at least three to six months’ expenses, you can handle many emergencies without going into further debt. Without that fund, Fool.com says, you could spiral into debt.
Knowing how to get out of debt and doing it are two different things. You can do it if you put your mind to it and think about how being debt free would allow you to do more desirable things with your money. The recommended steps above will help you on your way to a debt-free life.
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