Everyone wants to know how to get out of debt as fast as possible. The truth is that it is more of a marathon than a race. It’s going to take work, but the effort will be well worth the freedom of paying off debt. Preparing a budget, income management, and tracking expenses are actionable items you can take to help become debt-free. Let’s learn more about the best way to pay off debt by using the tips found here.
Preparing a Budget
If your goal is paying off debt, you need to know where your money is going. A budget will help you aid your income management by knowing how much you are bringing in each month through all sources of income. You will also gain a better understanding of how much you’re spending on groceries, entertainment, dining out, etc. When you’re tracking expenses, it’s easier to spot areas where we’re spending too much.
50 30 20 Budget
There are many types of budgets out there that you can use as your guide. The 50 30 20 budget was coined by U.S. Senator from Massachusetts, Elizabeth Warren. This popular budgeting tips works like this:
Calculate your after-tax income
Cap your needs to 50 percent of your after-tax income
Limit your “wants” (basic niceties like cable tv, gym membership,etc.) to 30 percent
20 percent goes towards savings and debt repayments
The best way to pay off debt is by creating a budget that you use. People know that a budget is important in their financial life. Many are motivated and energized by creating a budget. But few people will continue the habit of staying on their budget. We have a few budgeting tips to help make it easier to stick with it.
Budget Before the Month Starts
Being proactive and thinking ahead is just good all-around advice. Take the time to figure out next month’s budget ahead of time. Not every month is the same. There’s holidays, birthdays, graduations, road trips, etc. to account for.
The Best Way to Pay Off Debt: Be Realistic
Your budget should be based on your history of spending. So if you have spent $300 on grocery shopping every month, don’t cut it down to $150. It’s not realistic to pay off the debt by cutting down your expenses extremely. See if you can reduce it little by little or reduce other line items like your entertainment budget.
A budget doesn't mean to be set in stone. It’s a tool to put you in charge of your money. So if it needs to be adjusted because you spent more or less than planned, feel free to do it. The goal is that you are spending less than you’re making. As long as you’re doing that, you’re winning.
Paying Off Debt
Here’s a roundup of ideas on how to get out of debt that you can try to help you along.
Pick up a side hustle - Increase your income stream and use those extra funds to pay down your debt faster. Become a virtual assistant, mow yards, pet-sit, or drive rideshares are just a few ideas
Sell things you don’t need - This is a good way to clear your attic while making a little bit of money to go towards your debt-free goals.
Consider a balance transfer - Credit cards that offer a 0 percent APR on balance transfer for a specified amount of time could help lower your interest fees. Keep in mind that you need to plan to pay it off before the period is up, and there might be a balance transfer fee involved.
Reduce or minimize your expensive habits - Small changes make big impacts in the long run. Cut down on alcohol or tobacco, eating out for lunch, daily coffee runs, and other similar behaviors. Brew your coffee at home and take it with you instead or treat yourself out to lunch once a week as a “treat.”
If you have a lot of debt, you might have considered whether to use a debt settlement company. Paying third party debt negotiators is expensive, and there are no guarantees. Consider credit counseling or DIY your debt settlement instead.
About the Author
Anjana Paul is a banking professional who is passionate about helping others make better choices when it comes to money. In her spare time she is a freelance writer with years of expertise in the financial industry. She primarily writes about topics such as student loans, building credit, budgeting, retirement and other personal finance topics.