Do you dream of living debt free? As long as a person has debt, they are working for someone else. Unfortunately that someone else is a bank. The ticket to be debt free is to change how you are managing your finances.
Today, debt is as American as apple pie with trillions owed in mortgages, auto loans, and credit cards. Household debt in 2017 stands at $12.35 trillion. It is only slightly lower than the 2008 figure of $12.68 trillion. The average American household owes a little above $28,535 in auto loan debts, $172,086 in mortgage debt, and $16,000 in credit card debts.
Considering those statistics, Americans have too much debt. To improve their financial future, debt needs to be managed more prudently. To become debt free, people need to be educated that debt makes them a slave to creditors. The answer is based on becoming willing to change, finding a solution, and following it up with action.
How to be Debt Free
Most people have similar financial goals. Most of these goals are about achieving a better quality of life. More specific goals include becoming debt-free, savings more money, improving personal relationships, and building a secure financial future for their family.
Of course, everybody who is in debt wants to be out of debt. They also want to break the cycle that keeps them going back into debt. The majority of people never learned how to be debt- free. In high school, students learn how to cook in Home Economics, but are not taught how to balance checkbooks, save money, and invest for their future.
High-interest credit cards are one of the key factors driving people to excessive debt levels. Wouldn’t you rather pay yourself instead of paying creditors high-interest rates? It is possible when you implement a couple of simple practices. By learning a new way to manage money, you will have a brighter financial future.
Steps to Reducing Debt
One option is to consider debt consolidation if you owe money to many different creditors. This approach allows you to combined many different credit cards or loans into one simple payment. It also helps to reduce the pressure from collection agencies if you have delinquent debts.
While it may seem complicated now, reducing debt is quite easy and is the first step in achieving financial freedom. All you need to do is make a few small adjustments to what you are currently doing. Doing this will help shed off the debt holding you hostage to these creditors. It might also let you pay off your debt much quicker than you thought and prevent you from going back into debt. Just imagine how much control you will have in your life when you stop paying creditors high-interest rates just to use their money.
Imagine enjoying life instead of joining the more than 70 percent of Americans that are unhappy with their jobs because they feel disengaged, unappreciated, and overworked. It is time you learn how to manage your finances. Do you want long-term financial stability? Today is a great day to change.
The Debt Snowball Strategy
The debt snowball strategy is perhaps the oldest practice for getting yourself out of debt. It is a simple plan and it works. This popular strategy is based on ranking your current debts based on interest rates. Focus on paying off your high-interest debts like credit cards or payday loans. Next, pay down auto loans and student debt. Last focus on mortgage debt. As soon as you pay off a high-interest debt, add the same payment amount to the next loan, and continue the process until you are finally out of debt.
To find extra money to pay down debt, you have to drastically cut expenses. This includes cutting off excessive spending on items like coffee, dining out, and vacations. All of the money you save must be applied to deb.
This approach also requires you to stop funding retirement accounts. Only contribute enough to capture the match that your employer contributes. You do not want to miss out on free money. Once your Debt-to-Income Ratio is brought down to 25%, you should start ramping up the amount that you contribute to retirement accounts.
To calculate your Debt-to-Income Ratio, see the formula below:
Debt-to-Income Ratio = Monthly Debt Payments/Monthly Income x 100
Example: $1000 in Monthly Debt Payments/$4000 in Monthly Income x 100 = DTI Ratio of 25%
When you combine the money that you have from reducing expenses with what you were contributing to retirement accounts, you will soon realize that you can make double monthly payments high-interestst debt as you make minimum payments to other loans.
Advantages: The snowball debt strategy works as people can free up money and pay off their debts once they follow the plan. It is also a good way of strategically reaching your desired debt-free lifestyle.
Disadvantages: The strategy requires that you reduce your contributions to your retirement accounts and sacrifice the quality of life to pay off debt. It also has a very low success rate because most people are unwilling to give up the small pleasures of life for years.
Create an Emergency Plan
When you take all that money every month and sink it into paying debts, you will be making a noticeable step towards achieving a debt-free life. However, when you run into a financial emergency or hardship, the first place you will want to turn to is to use credit cards and loans.
Rather than using all your available money for paying debts, work on saving up three months of living expenses in an emergency fund. Start by putting $25-$50 per week to the side. keep this money in a checking or savings account. By having an emergency fund, it will prevent you from using credit cards and going into debt. Whenever you require money for an unforeseen expense, you just withdraw the funds from your bank.
Write and Follow a Plan
Write a financial plan. Stick to your plan and use it as a guide. Let it guide you to escape debt. It might be hard at first. You are modifying your lifestyle. Change is not easy, but it is necessary to make progress in your financial life. Your written plan should spell out the steps above and include additional layers including investments, insurance, and education to make the most of the opportunities that you will be able to take advantage of after you pay off your debt.
While this sounds simple, it is not easy. This is common sense information that you might have heard before. Your debt reduction plan is your ticket to becoming debt free and it will also increase your retirement dollars. The best time to get started on this life-changing financial adventure is now.