A Concise Overview of How to Get Out of Debt
The First Step to Get Out of Debt - Get Organized
To get out of debt, start by making a complete list of all of your debts (outstanding balances, interest rates and charges) and prioritize them in order of importance. Mortgage payments and vehicle payments are typically at the top of most lists.
Next, create a monthly spending plan and then track your purchases to help you stay within your budget and maximize your ability to pay down your debt. Creating a spending plan (a budget) and tracking at least one month's worth of your spending allows you to see what's really going on with your finances (most people are surprised). Based on what you observe, you can then put together a realistic plan to begin paying off you debts. People who skip these steps tend to continue to spend more than they make and either get further into debt or don't make much progress getting out of debt.
Set Goals to Pay Off Debt
Establish realistic goals for paying off your credit card debt as well as other consumer debt (lines of credit, vehicle loans). While it is easy to run up credit card balances in a short period of time, it will take time and self discipline to pay them off. Monitor your progress regularly to help you stay on track and motivated to reach your goals.
Pay Off Your Credit Cards - Here's How to Do It
Each month after you pay your debts that have fixed monthly payments (mortgages, vehicle and term loans), only make the minimum payments required on your credit cards with the lowest interest rates but maximize your payments on the credit cards with the highest interest rates. Once a credit card is paid off, use this extra money to pay down your credit card with next highest interest rate. This will save you money and help you pay down your debt faster.
Consider paying off credit cards with small balances first. Psychologically it shows that you are making progress. Once paid, cut up and cancel the credit cards. Most people only require one major credit card and perhaps one retail credit card with savings incentives during special sales events. For more tips on paying down credit card debt, click here.
Consolidate Your Debts
Consider consolidating your debts with a consolidation loan or transferring your credit card balances to a low rate credit card. Carefully investigate the terms, conditions, any hidden fees and also evaluate the overall interest savings you may realize. Cut up and cancel your credit cards if you choose this option, otherwise you may be tempted to continue using your credit cards and further increase your debt load. To learn more about the 8 ways to consolidate your debt, click here.
Out of Sight, Out of Mind
Put your credit cards away until you have completely paid off the outstanding balances. Paying for your purchases with cash instead of credit will help you separate needs from wants.
The furthest thing from your mind might be savings – setting money aside for spending later. But, if you don’t want to reach for your credit card the next time you face an unexpected expense, you need money set aside for a time like that when you need it.
Check Your Spending for More Ways to Save
Review your monthly expenses and look for opportunities to cut your costs. Making your cup of coffee in the morning instead of buying a $3 specialty coffee will save you over $1,000 a year!
If you regularly contribute to a savings plan consider suspending the payments until you have paid off your debt. The money you save by paying down your debt faster will be substantially higher than the interest you will earn in a savings plan. Also consider using income tax refunds, pay increases or other unexpected funds to pay down your debts.
Get Help Sooner than Later
Tackle your debt sooner rather than later. The sooner you start, the more options you will have. People who wait too long to deal with their debts often have less realistic options to consider than if they had started even 6 months before. Making the decision to deal with your debt and making a plan to eliminate it can be challenging. If you need some help or advice - or if you are feeling overwhelmed - contact a financial planner or a non-profit credit counselling service in your area. We have a list of non-profit credit counselling services across Canada that provide confidential help and advice.
Learn More about Getting Out of Debt
For more advice and tips on how to get out of debt, check out the articles below: