An Action Plan for Getting Out of Debt
Losing a job, making a bad investment, or living beyond your means are just some of the reasons people find themselves financially underwater. It’s a tough topic to talk about and can be difficult to face. But you can get your debt under control with a solid plan.
Here are some tips for getting out of debt:
- Assess the Situation. First, what is your income each month? The money you bring in establishes your starting point. Next make a list of who you owe and what you owe them. For each bill, look at the balance, interest rate, and monthly payment amount. This will help you better understand your debt so you can begin to tackle it.
- Categorize your monthly expenses. There are “Needs” - what you pay to live each month, such as rent, heat and a car to get to work. Consider reducing the amount you spend in this category by taking steps such as switching cellphone carriers, optimizing your grocery list, and saving on car insurance. Next is “Savings,” which is money you pay yourself to establish a “cushion” or rainy-day fund for an emergency expense in the future, like a car repair or a sudden illness. Avoid spending on “Wants”, which are things we desire that cost a little extra like eating at a restaurant versus eating at home.
- Choose a Strategy. With this information, put together a realistic budget that you can follow each month. If you have some money set aside in a rainy-day fund and a secure source of income, you should prioritize getting rid of your debt over adding to your savings. Two common strategies financial coaches recommend to reduce debt are the “avalanche” and the “snowball”. In the avalanche strategy you devote any extra money, after making your monthly needs payments, to paying down the debt with the highest interest rate. This reduces the amount of interest you pay over time. In the snowball method you pay the debt with the lowest balance first, regardless of interest rate, cutting down on the number of bills you owe more quickly by eliminating the smaller ones first. When one debt is paid, you move on to the next lowest amount.
- Consider Consolidation. Combining your debts into a new loan with one institution allows you to have just one payment to focus on each month, which reduces stress and might save you money in the long-term if you are able to secure a lower interest rate. If you’re unsure about consolidating, talk with a financial coach who can help you look at the big picture.
- Think about Transferring Balances. Find out if you can move your debt from one credit card company to another that can offer you a better interest rate. Even if they offer you a promotional rate, such as 0% for 24 months, it will help you pay less, especially if you can repay your debt within the promotional period. It’s a simple process that, once approved, can be completed in a matter of a few days. But make sure to read the fine print to make sure there are no hidden fees and talk with your financial coach to create a repayment plan.
- Limit Credit Card Use. Credit cards are one of the fastest ways to get into debt if not used properly. Not using one can help you avoid it. Use automatic transfers in your online banking account for recurring payments like rent, insurance, and car loan payments. Make sure you are aware of the amount and timing of the recurring payments you set up in order to avoid overdrafting your account.
- Find a Financial Coach. Even the best athletes need a coach. If you are struggling with your budget, it helps to work with someone who is trained in the best practices and can partner with you. At Workers Credit Union, our Workers Way financial coaches give judgement-free advice and help you create a step-by-step plan. Schedule an appointment to meet with a coach virtually or in-person at any of our locations.
Don’t allow your debt to define you. Meeting with a financial coach to take charge of your situation will put you on the road to solving it.
Share This Blog Post
Related Blogs View More
Give Yourself a 2022 Financial Makeover
Financial wellness is an important but often overlooked resolution. We go over tips on how to start your new year strong and keep your resolution.Read More
End of Year Financial Checklist
The end of the year is coming up and as with many things, luck favors the prepared. Here is a list of steps you should take between now and December 31.Read More