Debt can get out of hand and quickly derail your budget. If you spend too much money on repaying your debt, with interest, you will not have enough to pay for current expenses. This will cause you to use your credit cards even more, making your situation worse.
It is all right to incur debt for a mortgage, because the debt is backed by an asset, the value of your home. Also, car loans are sometimes necessary, because most people need a reliable vehicle to get to work. Not everyone has enough cash to pay for a car outright.
However, debt in the form of credit cards is best avoided. If you have credit card debt now, work on getting your balances paid off, instead of continuing to charge more. The following steps will get you out of debt as quickly as possible.
1. Stop Using Credit Cards
This may be difficult, but the first step to get out of debt is not to incur any new debt. Reduce your expenses as best as you can. If it is impossible to get through the month without using your credit cards, you need to move to a cheaper place, get a roommate, or take on a second job. Be strict with yourself. Don’t make any more purchases unless you can pay in cash.
If cash is inconvenient to carry around, get a debit card. Using a debit card is just like a credit card, except that the money gets taken out of your bank account right away.
2. Pay Off the Smallest Debt First
It may seem better to pay off a card with a higher interest rate initially, but eliminating the smallest debt means that you will be done with one debt fairly quickly. This will give you a psychological boost, and will free up that payment to be applied to the next card.
Just make the minimum payments on all cards except for the debt with the smallest balance. Pay as much as you can toward this card every month. If you can earn a little extra money, put it toward this card. Any gifts or bonuses can also be used to pay off this debt.
Once this first debt finished, use the money that went toward it every month and start attacking the next smallest balance. You will now have more money to put toward this second debt, so paying it off should go faster. Keep repeating this process until your debts are completely paid off.
3. Build Up Some Emergency Savings
Every month, set aside a small amount to put into a savings account. After some months, this will build up to a nice amount. Don’t use this money for anything except emergencies. The purpose of having a savings account is that you can use this money to pay cash in an emergency, instead of charging it. This will keep you from getting further into debt. If you do have an emergency and need to use your savings, start building it again as soon as the emergency is over.
Follow these simple steps, and you will be debt free in as short a time as possible.