Last updated: 23/07/2020 | Estimated Reading Time: 4 minutes
9 steps to becoming debt free
Are you struggling under the burden of debt? Do you wish you could pay off all your debts and live securely? Many people get caught up in the trap of credit cards - putting more and more of their spending on credit cards hoping the debt will somehow just vanish. Unfortunately, this strategy isn’t going to work. Instead, try our 10 steps to becoming debt free.
In This Guide:
- Step 1: Create a realistic Budget and stick to it
- Step 2: Create an emergency fund
- Step 3: Close your credit cards
- Step 4: Pay more on your balances each month
- Step 5: Watch spending on food and entertainment
- Step 6: Consider alternative options
- Step 7: Buy and sell used
- Step 8: Negotiate for a lower interest rate
- Step 9: Have a plan!
Step 1: Create a realistic Budget and stick to it
By building a budget you are forcing yourself to pay attention to every small payment you make. It means you look past the large expenses and focus on the ‘enjoyment’ spending that often spirals out of control far too quickly and becomes a hazy blur.
By looking at where all your money is going, it enables you to see saving opportunities that will mean you can stop adding to the debt and start paying it off.
Step 2: Create an emergency fund
One of the most common reasons people starts to accumulate debt is because they don’t have a fund set aside with money to account for any unexpected expenses. Without an emergency fund to fall back on for situations such as a boiler repair or funeral expenses, a credit card or loan must be used.
Most financial experts advise keeping an emergency fund of about £1,000. However, don’t set this as a limit, set it as an initial goal and add whatever you can as you go along to add to your financial security.
Step 3: Close your credit cards
By closing off your access to credit cards you are forcing yourself to be independent of them. Whilst this may seem daunting at first, in the long run it will help you to be free of all your debts. If you’ve made the changes in your budget and have some extra income, closing your credit card accounts is the next best thing for you to do in order to become debt free.
Step 4: Pay more on your balances each month
To make headway on paying your credit card balances, pay more than the minimum repayments. Credit card companies thrive on minimum repayments as it is an easy way to make more money from their customers. This is because people remain in debt for longer causing them to pay much more interest - resulting in even the smallest balance taking a very long time to pay off. So put a stop to that now and pay more whenever possible.
Step 5: Watch spending on food and entertainment
Money spent on food and entertainment can easily begin to add up, and before you know it, it accounts for a very large portion of your monthly expenditure. By planning meals at home and buying unbranded food you can easily cut back on the amount you spend on food and drink.
If you’re still keen to go out, think about community-based events that offer deals for families, or that are cheaper as they are volunteer-run. These are much cheaper than most other options and tend to be a lot more fun too!
Step 6: Consider alternative options
If you have multiple loans or credit cards you may want to consider a debt consolidation loan. Debt consolidation is a form of debt refinancing that involves taking out one loan to pay off many others. This means that interest rates can be reduced so money is put towards paying back the actual loan rather than on interest.
Step 7: Buy and sell used
An easy way to cut down on spending is to not buy everything new. This is especially useful when you need to buy pricier items, such as furniture. Online auction sites, or friends willing to give you a deal, can often offer items at much lower prices than if you’d bought brand new.
This enables you to save much more money, which you can put towards your debt. Selling items is also an easy way to earn extra money that can go towards bills.
Step 8: Negotiate for a lower interest rate
A good option is to call creditors and ask them to lower interest rates. Surprisingly, many creditors are often willing to lower rates based on your previous payment history and account standing. You will be in a better position to qualify for this if you’ve maintained a good relationship for a few years. This can help you save some money on interest payments as you pay down that debt over the course of the year.
Step 9: Have a plan!
Solving problems with debt is going to be a long and complicated process but if you have a plan it should be a little less painful. Debt relief companies work with consumers to help them communicate with their creditors, set up a plan, and get their debt settled. Even if you’re really struggling, there are still options. Companies such as National Debt relief are there to help and stop you from filing bankruptcy.