The only thing more challenging than getting rid of debt is trying to do so without a plan. Paying down your debts depends on knowing how much you owe, to whom, and what your options are for doing so. So, let’s turn that cluttered desktop full of receipts, bills, and credit card statements into a system you can actually use to get out of debt.
Here are four tips for getting your personal finances organized, so you can get out of debt for good.
Create a Budget
Creating a budget can sound, well, boring. Luckily, we’re living in a time when it’s possible to track your spending without having to sit down and manually plug numbers into a template. If you’ve been avoiding making or updating your budget, start by downloading an app that automates some of the “boring” parts of money management. Once you link your accounts, you’ll be able to see your spending habits reflected in real time.
There’s almost certainly extra money somewhere in your budget that you can free up for debt repayment; it’s your job to uncover it. Understanding your spending habits will help you change them and repurpose that cash.
Set Specific Money Goals
Knowing you want to get out of debt is a start. But that goal is vague. What’s more useful is coming up with S.M.A.R.T. financial goals that are:
- Specific: Exactly what outcome do you want to achieve?
- Measurable: How much debt do you want to pay off? How much money do you want to save?
- Achievable: Consider the distance between where you currently are and where you want to be.
- Realistic: Understand how this goal will relate to the rest of your life — like your physical and mental health. This provides a sense of why you’re chasing it.
- Time-Limited: What’s your timeframe for accomplishing each S.M.A.R.T. goal?
Writing down you want to eliminate $11,000 in debt spread across five credit cards within five years because it’s affecting your day-to-day wellbeing is something you can use to motivate you and come up with a plan.
Explore Debt Relief Options
The next step is figuring out how you’re going to tackle your debt so you can hit your S.M.A.R.T. goals. The exact method(s) you choose will depend on how much debt you have, what types you have, your credit score, your job situation and other factors.
Debt consolidation is one strategy people use to streamline multiple debts with high interest into a single payment.
One way to achieve this is transferring the balances on certain credit cards to a new one with zero interest for an introductory period.
Another way to consolidate your debts is to take out a loan with reasonable interest; use it to pay off your other debts with higher interest, then come up with a plan to repay that loan month by month.
Yet another way to organize a handful of debts is to work with a credit-counseling agency to get on a debt management plan. You’ll pay the agency an amount suitable for covering your bills each month and they’ll distribute payments to your creditors accordingly.
If you’re unable to qualify for a consolidation loan with a favorable rate and are starting to think bankruptcy is your only way out, look into settlement first. This strategy hinges on negotiating with your creditors to get your debts reduced in exchange for repaying them in a timely manner.
Understand and Raise Your Credit Score
Credit score relates to debt because it dictates what lines of credit you’re able to get, and how much you’ll pay in interest to borrow that money. By understanding what factors make up your credit score and taking action to raise it, you’ll be solidifying your overall financial foundation — an important step in distancing yourself from the cycle of debt.
Getting organized is the first step in getting out of debt. Create a budget, set specific goals, research your debt relief options carefully, and pay attention to your credit score.