Becoming debt-free can go a long way towards improving one’s quality of life. Having debt can be regarded as both positive and negative. For someone looking to buy their first home, establishing a good credit record can be useful. Once you start struggling to keep up with debt repayments however, that’s when the trouble starts. This can be regarded as a sign that you need to become debt free.
3 steps on how to become debt free:
- Assess your finances thoroughly
A good place to start would be to know exactly how much income you’re bringing in. You also need to know exactly how much money you’re spending. This will give you a good indication of where you need to reduce your spending so that you can allocate more money towards paying your debt off. Becoming debt free requires diligence and consistency, so once you have a budget in place you can work out how much money you need to allocate towards this monthly.
Make room for your savings
While having debt can help you improve your standards of living in some ways, it can get in the way of establishing a solid savings plan. Once you have this in place you need to work on steadily becoming debt free.
Calculate your exact expenses
It’s essential to know exactly how much you’re spending on a monthly basis. So if you’re spending on coffee daily it eventually all adds up by the end of the month. So you could find ways to reduce unnecessary spending and use that money for paying debt off.
Draw up an accurate budget that truly reflects income and expenditure
A budget is an itemised summary of expected income and expenses for a defined period of time. It should ideally help to keep track of spending patterns.
In order to create an efficient budget, it’s important that you provide as much detailed and accurate information as possible.
List all monthly expenses and divide them into fixed or variable expenses– make sure that you list all your expenses. Even the coffee you buy every morning on your way to work makes a difference.
This may be one of the easiest ways of becoming debt free. By simply making a few changes to how you spend money, you can end up debt-free much faster than originally anticipated.
- Check your credit record
Your credit record will indicate where you need to make changes. If you are spending too much money on your credit card, by eliminating this debt you could become debt-free. Check with credit bureaus and keep in mind that you can get your credit record once a year for free. Make sure that you correct any errors on your credit record.
- Start paying debt off as soon as possible
There are two options:
- Snowball effect- paying off the smallest amount of debt first
- Avalanche method- paying off the debt with the highest interest rate first
Choose the option which will work best for your financial standing. If that means enlisting help from a financial expert, do so.
If you are struggling, contact your creditors immediately.
If you avoid doing this, you may end up being charged additional interest, which means that you will be paying debt off for even longer. Be sure to set yourself clear goals too.