Stop Using Credit Cards
Credit cards are not an ideal way to stay rich, but avoiding them is a great way to get out of debt. Instead of using a credit card to make purchases, use cash or a check. Using cash rather than credit has repeatedly been shown to be more effective at helping people stay within their budgets.
Determine Your Debt-to-Income Ratio and Adjust it
You’re not alone if you’re feeling overwhelmed by debt. The average American household carries over $8,000 in credit card debt alone, and we owe more than $1 trillion in student loans, and this figure is growing by the second. Our collective financial troubles are so bad that some experts predict the next Great Depression could begin with our economic crisis hitting critical mass.
When starting your financial recovery plan, it’s essential to take stock of where you stand today. That means determining your debt-to-income ratio and adjusting it accordingly so that once you start paying down these bills, they will be manageable for years instead of creating new ones every time an unexpected expense comes up.
What is the Debt-to-Income Ratio?
Your DTI measures how much money goes toward servicing debts versus how much is available for other expenses, such as housing costs or leisure activities like going out with friends or taking vacations. For example, If your total monthly income is $3,000 per month after taxes have been withheld from all sources combined, including salary, then ideally, no more than $1120 should go toward paying off debts. Each month before any other obligations are met, like rent payments and utility bills, leaving another $1,480 to cover other expenses like food, shopping trips, $250, and entertainment, $600. The ideal DTI depends on whether children are involved; however, most experts recommend keeping your DTI below 36%.
Evaluate Your Expenses and Make Cuts
Finding ways to reduce spending is crucial when getting rid of debt. It can be difficult at first, but once you get used to living within your means and making cuts, you won’t miss the money going toward unnecessary purchases.
The first step is to take a hard look at your current budget and see what areas are costing you more money than they should be. Is there something that doesn’t need as much attention as other things? Are some items going out monthly without being replaced until they run out? What about subscriptions or memberships? Are they worth their price tag? Also, check over your bills; something may need cancellation or consolidation.
Set a Budget and Stick to it
Create a budget. You can’t get out of debt if you don’t know where your money is going.
Set up an automatic payment plan. Remembering to pay each bill every month is stressful, and it only makes it harder for you to track what bills have been paid and which ones haven’t.
Make sure you have enough money left over after paying all your monthly expenses to make ends meet throughout the month without having any extra funds available for personal spending or savings goals like paying off debt or saving for retirement.
Create an Emergency Fund
The next thing you should do is create an emergency fund. An emergency fund is a cushion to help you survive something unexpected, such as a job loss or medical emergency. This type of safeguard helps to protect your home and standard of living. In other words, it prevents you from falling into debt when life throws unexpected punches at you. A healthy emergency fund can prevent many people from defaulting on their mortgages!
Supplement Your Income to Pay Off Debt Faster
Get a second job. Many people can find work on the side, whether driving for Lyft or selling items on eBay or Craigslist. There are many opportunities if you have some extra time to make cash.
Sell unwanted items on Craigslist, eBay, or at a garage sale. It can help generate extra money for paying off debt and get yourself some more space in the process!
As you can see, there are several steps you can take to pay off your debt. The most important part is realizing that you have a problem and then coming up with a plan for how to solve it. It could take some time, but it will be worth it in the end. Best of luck!
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