Sadly we don’t know any magical spells that can make our debt problems disappear.
If you’ve just started making debt, stop now, turn around and save yourself. For those of us that have already gone down the rabbit hole and are now at a tea party with mad debt collectors, it’s time to stop the clock and consider our options.
Finding your way out of a financial nightmare is not easy – it takes a lot of perseverance, sacrifice and, above all, patience. That is not to say it isn’t possible. The world is filled with thousands of ex-debtors. You just have to find what works best for you.
Here are three very basic, but difficult, first steps that you can take to start paying off your debts:
1. Create a Snowball Budget
Unlike most budgeting systems, like the envelope system, the Snowball Budget focuses on only one thing: your debt.
The concept is simple: pay the smallest debt first.
Start by making a list of all the money you owe. Most goals start with a list, and like with most lists, the more information the better. Make sure to include the amounts that you owe, who you owe, the minimum monthly payments, the interest rates and any other information you might have.
Some trains of thought argue that you should pay the debt with the highest interest first. When using the Snowball Budget, you completely ignore the interest rates.
Once compiled, arrange your list of debts from the smallest amount owed to the biggest. Decide on the percentage of your income that you can spend on paying back your debt. The idea is to pay as little as possible on all of your accounts and loans, except for the smallest one. To keep a positive credit score, try to pay the minimum amount on all your various debt accounts. Use what you have left to pay extra on the smallest item on your list.
Once the smallest debt is paid off, don’t adjust the amount you pay towards your debt. Instead, now pay more on the next smallest item on your list, until all your debt is paid off.
2. Throw all your extra money at the problem
You’ve been living as frugal as possible for months in the hopes of ridding yourself of debt, when finally someone throws you a bone. An unexpected tax return from Uncle Sam, a birthday cheque from grandma or a performance bonus from the boss. The temptation created by a little extra cash when you are in debt is worse than a double thick chocolate milkshake when you are on diet.
You’ve been good for so long, why not spoil yourself? No! Remember: perseverance, sacrifice and patience.
Take every extra cent that you get and pay it towards the smallest debt on your list.
3. Start an emergency fund
Whenever someone tells me this I burst out laughing. How do you expect someone to save if there is nothing left to save? Almost all personal finance books have a chapter named something like Pay yourself first.
It is this conundrum that prohibits most people from becoming debt free. Without an emergency fund there is no room for error or unexpected surprises. When your car suddenly needs a new tyre, you can either start walking or make more debt. The slightest breeze that upsets our delicately stacked pack of cards blows everything off the table, forcing us to start from scratch.
If there is even the smallest possibility, open a savings account and start saving what you can. The idea for now is not to save up for a home or car, you just want to make sure that you have something stashed away so that when emergency strikes, you don’t have to create even more debt.
Do you have any tips of your own to share? Leave your suggestions in the comment section below.