Best Practical Ways to Get Out of Debt

For many of us who work for a living, a financial struggle is something that seems inevitable. There are so many necessities tugging at your pocketbook like monthly bills, food, car expenses – the list goes on. This is where having a debt becomes stressful, especially if you don’t know how to handle it properly. If you take out a bank loan, you are obligated to pay it back as agreed, no matter what your circumstances. If your life leads you to losing your job, or you get into an accident, or an emergency, or you become a single parent, etc. – situations that likely increase your financial burden – your obligation to pay that loan does not change. Life is unpredictable.

However, there are cases when debt can just be a result of overspending. The key to getting out of debt starts from you maintaining self-control and setting goals towards your financial freedom. A lot of people try to get rid of debt, but give up when they find themselves stuck and helpless. There’s a lot of simple tips and life hacks that can help you eliminate your debt in a short period of time. Here are some practical ways to get out of debt:

1.       Stop Borrowing Money

This is the obvious one. Always remember to stop using debt to fund your lifestyle: if you can’t afford it, don’t buy it! This means not giving into your shopping addiction or compulsive buying habit. Avoid signing up for more credit cards. Focus on what you need over the things you want. Focus on sticking to your strategic plan to get rid of your debt.

2.       Make it a Habit to Stick to your Budget 

This one is about being consistent. When making a budget, track and balance both of your monthly income and expenses. It will help you monitor your financial situation so you can move forward and plan on how to clear your debts. By monitoring, you will identify if you have extra money (surplus), or if you still have negative income (deficit). The goal is to increase your surplus and use THAT excess money to pay off your debt. To build a higher surplus means earning some extra cash and/or trimming down your expenses.

Earning some extra cash can be done by picking up those extra hours at your job or finding a second part-time job or services. Just make sure you are able to do it within your limits and capabilities – never compromise your health! Adding medication or hospital bills is the last thing you want to happen if you’re in debt.

                                                                                                             

Trimming your expenses means prioritizing your needs over your wants, cutting out the unnecessary stuff like your gym membership, cable and magazine subscription, home phone, Netflix. Minimize eating out at your favorite café or restaurant. It’s not easy, but neither is a life in debt.  

3.       Create/Build an Emergency Fund

It might seem counter-intuitive to save money while you are currently in debt. But in doing so, you can help your future-self avoid the immense strain. You can start by keeping a $1000 emergency fund. The idea is to avoid taking out more loans or charging more on your credit cards by having cash ready in case of emergencies.

If you are a home owner, there is also a home equity line of credit (HELOC) possibly available to you. A HELOC is a revolving line of credit secured by equity in your home – a line credit you can use as your emergency fund along with other purposes such as paying off your debt, etc. However, use it wisely! It can become another problem if you don’t pay it back on time. Still, it is a good available option to you if you need it.

4.       Use a Balance Transfer

Getting offers for zero percent credit cards is very tempting and can be a good way to pay off your debt. You can convert your high interest credit card debt to zero interest credit card debt via balance transfers. You may also be able to consolidate multiple cards balances onto one card.  With discipline, you can use the grace period to transfer your balance and help you get out of debt. But remember, you can only get this privilege if you’ve got good credit.

5.       Use a Personal Loan

      Obviously, you don’t want to create more financial obligations, however, you can use the funds from a personal loan to pay off your credit card debt. Why? A personal loan will carry a lower interest rate than your credit card, so in effect, you are “transferring” the balance from a high-interest account to a lower interest account – saving you money.  There is the added benefit to your credit scores since you’ll be converting “score damaging” revolving debt into “score benign” installment debt. 

6.       Organize your Debt

It is essential to organize your debt with its interest rates, minimum payment and actual payment on the list. This can help you map out a plan to paying it off more effectively. If you are having a long list of debts you want to settle, there is a Debt Stacking method you can use wherein you will be comparing several debts and using the differences in the interest rates and minimum payments to mathematically calculate the fastest and least costly way to pay your debts off. This method will give you a better plan to get out of debt sooner.

7.       Throw Excess Cash at your Debt

Like we said at the beginning of the article, “Life is unpredictable.” Sometimes your luck is unfortunate, but other times life presents you some excess cash. You might win a bet, receive an inheritance, or get a tax refund. The idea is to prioritize paying your debt whenever you get the chance. The more cash you can put towards your debt, the faster you can get rid of it.