According to figures from the Federal Reserve, total U.S. outstanding consumer debt was $3.34 trillion as of February 2015. That figure excludes mortgages, but it includes car loans, student loans, and revolving debt. Total U.S. outstanding revolving debt, which is chiefly made up of credit card balances, was $884.8 billion as of January 2015. Tweet this stat! These are alarmingly high numbers and chances are that your debt is currently or has been actively participating in helping these statistics rise, at some point.
Getting yourself into debt is easy; it’s getting yourself out of debt that can seem difficult—almost impossible to some people. If you're like may Americans, you may not know where to start when it comes to getting out of debt. And, that’s okay.
Getting rid of debt takes dedication, but the steps are simple. Here is our easy 5-step guide to becoming debt-free.
1. Make a list of all your debt
This is the first, and a necessary, step to getting out of debt. Start by getting a copy of your free credit report. to show you--in black and white--a list of all of the debts that you owe, aside from those loans from family and friends. After you have this high-level overview of your existing debt, start writing down your debts in order of highest to lowest interest rate. This information can be obtained from your bank, a statement, or online account information. Some other important numbers you will want to jot down are your outstanding balance for each debt and the minimum monthly payment.
2. Start paying off your highest-interest debt first
Start by focusing your money and energy on the debt with the highest interest rate. While you can't forget about your other debt, consider paying the minimum amount toward the lower-interest debts so that you can focus more funds on the one with the highest interest. Your goal, here, is to pay off your highest interest-rated debt, and when that happens, "snowball" (the payment you were making to your high-interest debt plus what you're already giving to the next highest interest rated debt—according to your list) your payments as you work your way down your debtor list.
3. Create a budget—and actually stick to it
Recently a poll from Gallup showed that 32% of Americans create a budget each month to track income and expenditures, and just 30% have a long-term financial plan laying out savings and investment goals. While budgets can seem bothersome and time-consuming, they exist for a reason. Many times when people sit down and create their initial budget, their spending patterns become clear and suddenly—like magic—there is a light shining down on opportunities to save. Having a budget doesn't have to be an extra chore. In fact, it can be fun, easy, and give you a sense of empowerment since you are now the one in charge of your financial life.
4. Start an emergency fund
Life rarely goes as planned, that’s why it is important to have money saved away for a rainy day. I know, I know&mdashthat's easier said than done. It can be difficult putting cash away, even if it is just a small amount. In fact, according to a recent study more than 60% of Americans do not have enough rainy day funds set aside to deal with even minor calamities. And, 28% said they would either borrow from family or friends or use credit cards, just continuing to add to the debt we tried to pay down in Step 2 above. "What ifs" like these are the perfect examples of why you should start setting aside an emergency fund plan and follow through with it. Like most things in life, you have to start somewhere—and that somewhere is probably at the bottom, from scratch, with zero, from nada. But, it's ok; don't be discouraged. Set your initial goal low, and work your way up slowly. Start with a target goal that is attainable, and you'll be well on your way to having the funds needed for anything thrown your way.
5. Save. Save. Save.
This is a crucial part when it comes to getting out of debt. Saving, even if it’s just a little bit at a time, can help pay off debt. The more money you have saved, the more you can put toward the balances of the debt owed. Take on a part-time job or sell stuff that you don't need that is just sitting around your house. Like the saying goes, "One man's trash is another man's treasure." Try dining out less or cut back on luxury items that are not a necessity. It may seem like a difficult task now, but in the long run, the benefit is much greater. You may be surprised at all of the ways that you can find additional money.
Create goals for yourself and make sure that they are realistic. Ultimately, you want to pave your way toward financial freedom. While reducing your debt is the task at hand, you shouldn't forget about building your wealth as well. It is possible to start working on both simultaneously. Talk to a financial advisor, and follow the five simple steps above. And, soon, hopefully, you will be enjoying a debt-free life!