Do you have debt hanging over your head? Does it feel like a huge weight that you're lugging around that you just can't seem to get rid of?
Student loans, credit cards, car payments, personal loans or any other type of debt can be a significant burden, and cost you tons of money in interest. If your debt burden is keeping you up at night, it's likely causing you more than just sleep. It could also be causing you a lot of extra stress as well.
The key to lessening stress caused by debt is having a plan to pay it off. But before you can come up with a major debt repayment plan, there are some small steps you need to complete first.
Here are four things you need to do immediately if you are serious about tackling your debt.
CONFRONT IT. HOW MUCH DEBT DO YOU HAVE?
Ignoring your debt will never make it go away. When I first started paying down debt, I was terrified to know the truth. I always made the minimum payment and paid less attention to my balance or interest rate. My mindset was focused on making the minimum payment, not tackling the real problem at hand. The truth, I was too scared to add up how much debt I was actually in.
So first thing first, make a list of ALL debt that you have. Credit cards, personal loans, car loans, mortgage, EVERYTHING. Make sure to write down the total balance that you owe.
For now, don't focus on the interest rate or the minimum payment. This first step is meant for you to see the overall picture. It's a way for you to overcome your fear, and accept your situation.
Clarity is critical when you decide to tackle your debt. It allows you to know where you need to go and what you need to do to achieve your goals. It gives you a picture, though not easy to look at, it's a picture of what you need to accomplish to reach your end goal – being debt free.
STOP USING YOUR CREDIT CARDS. RIGHT NOW!
Nothing makes the problem worse than adding more debt to an even bigger debt pile. One of the things that made this step really hard for me was giving up the security of having my credit cards in my wallet. I know this may sound strange, but it made me feel better knowing that I had a way to pay for something that I might want, even though my bank account couldn't afford it.
It comes back to the mentality of just “paying for it later.” There is only one solution to this problem, if you don't have the cash to pay for it, don't buy it. Not having my credit cards on me, forced me to just say “no.” I didn't have a choice.
You really have to know yourself to be successful with this step. Some people choose to put their credit cards in a cup of water in the freezer, making them harder to access. Some people cut them up altogether. I know myself, and freezing my credit cards in the freezer wasn't going to cut it. I knew that the moment I wanted a new pair of shoes, a couple of hours of work chipping away at a frozen block of ice was not going to stop me from getting them. So, I made it literally impossible for me to use my credit cards. I cut them all up. Every single one of them.
Whatever you choose to do with your credit cards, make sure you can't use them anymore. I know some friends who actually gave them to a trusted family member to keep while they were paying off debt. It doesn't matter what you do but do something now so you can't access them.
CREATE A BUDGET
If you haven't already, creating a budget is the most important thing you can do if you want to pay off debt. Why is creating a budget so dang important? It will tell you where you want your money to go, and how much extra you can afford to put towards paying off debt.
Knowing how much you owe is crucial, but knowing how much you have is also important. Don't worry about making this step complicated. Don't get caught up in all of the little details. Create a bare-bones budget, and work on the details as you go. Just start.
Start by listing your expenses and your income. Do you have enough income to cover all of your necessary expenses? Do your expenses include your minimum debt payments? Make sure you make enough to cover all necessary expenses and at least the minimum payments on your debts. Any excess income can be used towards your debt payoff goals.
By creating a budget in this step, it will allow you to see if you have extra income to start paying down your debt. It gives you a starting point that you can build on later. It allows you to determine if getting a second job or turning a hobby into some extra cash is worth it. It tells you what you need to and where you need to go.
YOU NEED AN EMERGENCY FUND
OK, so I know you are probably thinking, “I need to pay off debt, so why is this girl asking me to save money instead?” I was asking the same question when I was told to do this. But in reality, it was probably one of the most important pieces of financial advice that I have ever received.
Tackling the debt you have now is important, but it's also important to not add new debt. If you don't have any money in the bank and an emergency does happen, how are you going to pay for it? You already got rid of your credit cards, right?
For the longest time, I justified my need to take care of an emergency as an excuse to use my credit cards. It was more than an excuse; it was the reality of my life. I had no other option than to use credit to pay for emergency expenses, and for a lot of people, it's the reality of their life too.
You need to create a buffer between you and your debt. Debt should never be your only option to take care of life necessities. I am not asking you to put all of your extra money towards building an emergency fund, all I'm asking is that you start one. I started with only $50 a month, but it was a start.
Your end goal with an emergency savings account is $1,000. You can pay off debt and save at the same time. Having clarity and knowing your financial priorities will allow you to do both. Put a small amount of money into a savings account every month, and to make it even easier, I suggest automating you saving contributions.
For example, set up a savings transfer between your checking account and your savings account for $25 to happen every month on the 20th. Now, the date you use and the amount you save might be different, but make sure you set it up through your bank. Automating your savings will make your life so much easier, you won't even have to think about it.
If you do these four things, you should start to feel a little bit better about your debt. Once you have completed these four steps, it's time to start thinking about how you want to start paying down your debt.
There are two debt repayment plans I recommend. I give you step-by-step guides on how to use them in the articles below.
Pay off Debt With the Debt Snowball Method
How to Pay Down Debt Using the Avalanche Method