How to become debt free : 5 easy steps
Putting yourself in negative net worth by incurring debts year after year is not a path to financial freedom. But getting out of debts and freeing up extra money is a sure ticket to growing your wealth. Being debt-free allows you more freedom to pursue a better career opportunity or who knows! You may even start your own business and be your own boss. Although, debt can be a valuable tool but only when controlled properly as you can easily find yourself in a hole that seems impossible to escape if you fail to manage your debt well.
For most people, debt is a fact of life. From credit card debt to home loans and down to the money you owe a friend, all kinds of debts hangs over our heads clouding our financial future. The good news is! There are so many people who are getting out of debt every day, and not only that, but they are getting out of debt in a short period of time. Getting out of debt and getting richer is a less daunting task like most people think, but like most other things, you need a plan!
So, if you want to be debt-free, it’s important you listen to these few easy steps.
Set up a good debt payment plan
The first step you need to take to becoming debt-free is to set up a debt payment plan. A good debt payment plan should tell you the order to pay off your debts, help you track your progress, and speeds up the time it will take to pay off all your debts.
Here are some debt payment plans to consider:
§ Make a list of your debts: This list should include the minimum payment amount, interest rate, and how much you owe in total. The list should also include all types of debts from loans to credit cards, even your mortgage.
§ Rank your debts: Next to be considered is ranking your debts in the order most convenient for you to pay them off. Some experts recommend paying from the smallest debt to the biggest once while others recommend quite the opposite. The order you choose is solely up to you, but the important thing is to stick to the list once you make it.
§ Find extra money to pay your debt: Now, it’s time to decide how much extra income you need to make to help you pay your debt. You may also need to cut back spending to help you save more money to put towards your debt payment plan. Another option to help get extra money is to take on a part-time job or pick up extra working hours at your current job.
§ Focus on one debt at a time: Focusing on one debt at a time helps you pay that debt quickly. When you spread your extra money over several debts, you are reducing the impact it has on your debt.
§ Build your savings: Once you have cleared all your debts, it’s time to focus on building up a savings account. This step will prevent you from going back into debt in the future. Creating an emergency fund is one of the best tools you can use to take control of your finances and avoid going into debt. Don’t forget to use your credit card wisely or not use it at all.
Reduce your debt to income ratio
Your debt to income ratio compares the number of your monthly debt payment to your monthly income, determines what your current financial situation looks like, It’s can also make a difference in the type of loan that you qualify for especially home loans. So it’s important you have a low debt to income ratio. You can determine your debt to income ratio by simply adding the amount you pay in debt each month then divide it by the amount you make each month the resulting percentage is your debt to income ratio. For instance, if you had $4000 in debt payment each month and made $40,000 a year, your debt to income ratio is 10%, which is considered good.
When your debt to income ratio is higher than 40% you are in danger of being unable to pay bills if you were to incur more debt. This makes you rely on your current income preventing room for new opportunities.
If possible…Stop using a credit card
The convenience that comes with the usage of credit cards makes people over-spend without knowing it. These credit cards have very high-interest rates, so it’s important to stop relying on your credit cards because it adds to your debts each month and prevents you from building wealth. Not using your credit card may be difficult but if you want to be debt-free, you have to come up with another way of doing things.
Negotiate lower rates
Negotiating reduced rates will make the debt payment process less painful. Getting a reduced interest rate on your mortgage requires refinancing but it’s worth it since the interest rate you’re likely to get is lower than the one you have.
