How to become debt free in less than a year
We are all feeling the pinch of the pandemic and things have been rough. Many of us continue to be in a difficult financial position. It’s easy to feel overwhelmed when so many things seem out of our control, so it’s important to begin focusing on what you have control of – such as spending less and be more aware of your money.
To help you get there, we have put together the key steps to getting debt free below.
1. Summarize your debt
Your goal is to be debt-free, so list out all your current debts. By knowing everything about them (amount, interest rate, and payments), you can decide on how to best address them. Remember why you want to get out of debt and use it to motivate you to move ahead.
2. Create a budget
If you do not have a budget already, starting one is easier than you think. Try to follow 50/30/20 rule to spend no more than 80% of your income. Use 50% of your income for essentials such as rent, food etc., 30% for wants and remaining 20% for savings or to pay down debt.
3. Increase your debt payments
Putting at least 15 percent of your paycheck towards your debt will help you pay down those obligations much more quickly. Making small, minimum payments means that your interest accumulates as every month or every year goes by. Paying off large chunks of your debt in a few months could save you a lot of money on interest payments alone.
4. Pay off your high-interest debt first
Do not be afraid to use part of your savings to pay high-interest debts. Using savings for debt repayment is a smart decision because you will stop adding interest on those large balances. Although it may feel comforting to have some extra cash sitting in your bank account, the truth is that those funds are not really working for you — not with today’s record low interest rates. Do not drain your savings completely. If you are sitting on a pile of cash, do use some of those funds to eliminate your bills.
5. Negotiate with your lenders
Call your lenders to negotiate your payments and lower interest rates. You will be surprised how many lenders will be willing to cut your interest rate based on your payment history and account status. If you have maintained a good relationship for a few years, you may be in a much better position to qualify for a lower interest rate. This can help you save some money on interest payments as you pay off that debt over the year.
6. Received a bonus or tax refund? Use that to pay down your debt
Call your lenders to negotiate your payments and lower interest rates. You will be surprised how many lenders will be willing to cut your interest rate based on your payment history and account status. If you have maintained a good relationship for a few years, you may be in a much better position to qualify for a lower interest rate. This can help you save some money on interest payments as you pay off that debt over the year.
7. De-clutter and sell what you do not need
You’ll be surprised at how many items you do not use that you can sell online for cash. Put together a list of items you could sell on eBay, Craigslist, or at a garage sale. Raising some additional cash by selling items you do not need and using the proceeds to pay down debt can help you quickly ease your debt load.
8. Find ways to increase your income
If you are determined to pay off this debt within a year, you should look for ways to increase your income and use that extra money to pay off debt quickly. Whether it is taking on a part time job or negotiating your salary with your employer, think of some ways to start earning more money for at least a few months and make debt elimination a high priority.
9. Use credit card balance transfer offers
Most of us usually tear up all those credit card balance transfers in our mailboxes. But if you want to go on a tear with your debt reduction efforts, a balance transfer can help. By transferring high rate debt to a zero percent deal — one that lasts for 12 months or so — you cut all credit-card interest. That frees up cash flow, giving you extra money to knock out those credit card bills. You should read the fine print before signing up to make sure you are really getting that low rate.
Remember it is about progress not perfection, so even if you cannot do them all, starting on just one is already a step forward. The more you pay attention to your money, the more aware you will be around the way you handle it, and the better your results.
Finjoy Capital is not a financial advisory firm.
This article is for informational purposes only and is not a substitute for individualized professional advice.
