If you’re in debt right now, we know how it feels. Want to know a secret? That feeling can go away--by paying off your debt! You can still have your finances under control even if your debt isn’t entirely paid off. The key to having control over your finances is having a plan. Every day can (and will) get better if you plan. You’ve probably heard this before, but if you fail to plan, you’re planning to fail. Here’s are three simple steps to pay off your debt.
This might sound like the obvious approach, but it’s important to consider that each dollar you’re spending today is a dollar that you could be spending on getting rid of your debt.
It’s true, you only live once, but having restraint today can mean that next week, next month, and the next five years can be even better than today.
Try to change your mindset from, “I can’t buy this” to “I shouldn’t buy this” or even “I don’t want to buy this.” By changing the internal dialogue from one of limitations to one grounded in a positive place of self-control and choice is essential. This is easier said than done, but here’s a trick: next time you spontaneously want to buy something, take a step back and wait two weeks to buy it. If, after two weeks, you still want to buy it, great--get it! More times than not, however, you’ll find that you will change your mind.
There are many important purchases you have to make as you grow up (a car, a house), and purchases that you don’t have to make as you grow up (that trendy watch or purse that’s over-priced and poor quality). Indulging is great, but indulging within limitations is key.
Audit your spending with a budget to find out if you are spending more or less than your income. If you are spending more than you make, then you first need to adjust your spending habits appropriately.
Spend 15 to 20 minutes (yes, that’s all it takes!), sit down, and write out where every penny you earn currently goes. This will likely include your rent, food, electricity, a phone bill, and, of course, the fun stuff with friends. You can even try to project out the next 3 - 6 months so you know where your money is going in the future.
Next, separate out your spending into two new categories: the essentials and the non-essentials. It’s important to be extremely objective in making these categories. You’ll quickly find that the essentials list is not very long. Conversely, the non-essential list will be much longer.
While creating your personalized, one-of-a-kind budget, if there are things you truly can’t live without, it’s important to be aware of that. For instance, if you love that daily morning latte at Starbucks, that’s okay. If you’re in debt, however, that may not be the best place for your money to be going right now. Instead, change the conversation with yourself to make that expense a reward. If you drink two less lattes a week that can be a savings of up to $10/week, $40/month and $2,080/year! And that’s leaving out the other 5 days a week that you get to enjoy a latte. Compromise and make a coffee at home just two days a week, and you’ll be very surprised by how much you can save.
There is no right or wrong way to make a budget. You may hear people tell you what percentage of your earnings should be going where--for instance, that you should be saving 20% of your money. If that’s achievable for you, great! If it’s not, then have that as a goal. Focus on improvement in your spending habits each day and each week, and the rest will fall into place.
If you’re already in debt, achieving pre-set quotas on how much you should be saving can be difficult, if not impossible. Start with simply knowing where your money is going, and that will help guide the type of budget you can stick to.
When in doubt, check out the free budgeting tools we referenced in our last blog post:
Read more in our last post on how to create a budget!
The last step to paying off your debt is simple: pay it off. It’s important to know that paying off debt doesn’t have to mean paying it off in full at once. It’s possible to be strategic.
The best option if you can’t currently pay off your debt in full is to refinance. Chances are high that you are getting ripped off with your current debt -- either you relied on a credit card company and now pay an unbelievably high interest rate or you relied on a personal loan company at have a high interest rate from when your credit score was lower in the past.
Ready to pay off your debt as cheaply as possible? At Backed, we’re specifically to help you reach financial independence. We offer rates up to 12% lower than other personal loan services. See if you pre-qualify today!