Today, I’m going to share with you how we to pay off debt quickly because all of us needs help on this issue.
Facts About Household Debt In the United States of America
Did you know the total household debt in the United States of America, according to Federal Reserve Bank of New York, has reached a new all-time high of $13.29 trillion dollars in Q2 of 2018? That is up by $454 billion from a year ago! The break down of household death is as follows:
- Mortgage Debt: $9.00 trillion, up $308 billion from a year ago
- Home Equity Line of Credit: $432 billion down $20 billion
- Student Loan Debt: $1.41 Trillion, up $61 billion
- Auto Loan Debt: $1.24 trillion, up $48 billion
- Credit Card Debt: $829 billion, up $45 billion
What about you? Do you believe these statistics is true? What about your own household debt? Does the statistics accurately reflect your own debt?
Believe it or not, most of us believe that having debt is the norm and there is nothing wrong about that. If everybody does it then it shouldn’t be bad right? Wrong!
I don’t know about you, but I don’t like being the norm. I want to win! I want to be better than the norm and if you are like me then this is the blog on personal finance that you would want to read because I will share to you how to live like a boss when everyone is contented living like the rest!
In this post, I will teach you how to get out of debt so you can live for yourself and not to your creditors!
How to Pay off Debt Quickly
Part 1: Developing a New Healthy Habit Is the Key to Your Success
I want to start by telling you that the quickest way to pay off your debt is for you to invest on yourself and I am not just talking about investing financially, but I want you to grow and develop skills that will help you succeed in paying your debt quick.
Let us be honest, no matter who teaches you or what method you use, it will be all useless if you don’t have the proper attitude or behavior. In contrast, even a rudimentary budgeting method will work like a gem if you successfully change your habits and perspectives since this will allow you to stick to the plan.
Develop a Vision for Yourself
Before doing anything else, it is best to start developing a picture of the future that you want to achieve. To do this, reflect on your current situation and ask yourself the following questions:
- Where do I want to be in 6 months, 1 year, 5 years, etc. financially?
- What are the things or who are the people that keep me from achieving my goal?
- What skills and knowledge do I need to achieve my goal?
- Do I know people who are successful financially to coach or mentor me? Are they willing to coach me?
My suggestion is for you to write down your answers in your personal journal or in front of your budget notebook. The purpose of this activity is for you to have a roadmap that would help you stay on the right path towards a debt free life.
Leverage the Power of Habit
Habit is probably one of the best weapons we have! According to Charles Duhigg, author of The Power of Habit: Why We Do What We Do in Life and Business,
“Champions don’t do extraordinary things. They do ordinary things, but they do them without thinking, too fast for the other team to react. They follow the habits they’ve learned”.
What does it mean to us?
It means people who successfully get out of debt did not do it overnight using a super effective method nor they are a smart or talented bunch. They simply chose to follow a simple money-management-routine that overtime replaced their bad spending habits. That being said, there is always hope for you to get out of debt no matter how deep you are in. You just need to replace your bad spending/ money management habits with the good ones I will share in a bit.
Part 2: Introduce Yourself to Your Money
Create a Budget
Not a lot of people have a budget because it is either confusing or time-consuming, but if you want to get out of your debt, then you have to write one.
I have written an article on, “Why a Budget is Important” for those who need more convincing. For those who are lazy to keep track their budget like me, then maybe my article on, “How to Automate your Personal Finance” may help.
The reason why a budget is necessary for getting out from debt is it will help you to know how much you are making and how much you are spending. It helps you understand your spending behavior so you can change it which is the key to getting out of debt.
Part 3: Prioritize
Determine which of your expenses are necessities and which are luxury
Another advantage of writing a budget is you get detailed information of where your money goes. Once you determine your monthly expenses then the next step should identify which of those expenses are necessities, things that you need to live a normal life, or which are luxury, things that you can still live even without.
After doing a budget you determine that your top expenses are car insurance, gas money, foods, clothes, gym membership, movies, phone plans, video games, and coffee.
Of course, our lifestyle is different so our answers will be different as well, thus I can’t dictate you which ones will be a necessity and which ones will be a luxury but the one thing I want you to do is to honestly ask yourself which ones are luxury. Once you determine it, then you need to let go of it gradually.
In our examples above, I will say foods, and clothes are necessary. My your work is far and my time is valuable so I would say car-related expenses is a necessity as well. I would identify gym membership, movies, phone plans, video games, and coffee as a luxury so I would try my best to eliminate these expenses or reduces how much I spend in these by looking for a really cheap or free alternative.
Cut cost, cut back, cut out
Maybe identifying gym membership, movies, phone plans, video games, and coffee as luxury is a bit too much. Maybe these things are “necessity” for you. Is there a way to still save money?
The right answer is you need to sacrifice something to gain another. If you want to get out of debt quick then you need to get rid of it, but this big lifestyle change might make you koo-koo so I will give you a “short-term” alternative; apply cut cost, cut back, cut out method.
I borrowed this method from CAP. The method is simple. Cut cost means you find for a cheaper alternative, cut back means consuming less, and cut out is totally removing the item or activity from your lifestyle.
- We can cut cost in our gym membership by looking for a much cheaper gym.
- We can cut back by only watching movies twice a month.
- We can cut cost with our phone plans by going for a cheaper phone and opting out for larger data.
- We can cut out video games and find part-time work instead.
- We can cut cost on coffee by brewing a cup before going to work.
Part 4: Resist the Temptation
Ditch the plastic, pick up the paper
Congratulations. You have done and survive to do all the things I have listed above!
But will you be able to do the finale?
Of course, you can! Believe in yourself.
I will now share the hardest financial discipline of them all; cut your cards and start using cash again. Yes, this is very inconvenient and so old school, but people back then have little or no debt so why not!
First of all, I want to make this clear that you are cutting your plastics not to forget your credit card bills but to stop making it bigger. If possible, consolidate your debt by transferring your high-interest credits/loans to much lower ones. Once you transfer the balance, then ask the provider to close your account.
Some frequently defensive questions about cutting the plastic are as follows:
What about the bills that require a credit card?
Keep one credit card. Keep the one with the lowest interest, and no annual fee.
Should I close my card that offers good rewards?
Credit card companies put rewards to encourage you to spend more. In addition to, a credit card with high rewards typically have a larger annual fee or interest (they will not give something to their disadvantage – they already calculated that)
I will share a little secret. You will save more if you spend less!
Am I forever ban from using a credit card?
No. I want to believe in you so I would say this is only for temporary. I just want you to pay off your debt as quick as possible and having a credit card would not help to forward the cause. However, if you can prove to yourself that you have developed good spending habits then go ahead and use your credit card.
How can we pay without our credit card?
The simple answer is to use cash. Once you write your budget, you will know how much money you will need every week. Withdraw that amount at the start of the week. Make sure to make your cash last else you will not have the opportunity to pay for items or services once your budget runs out.
You can also use VisaDebit for regular online monthly transactions.
How does using cash over credit card helps?
This is a great question so I will give you an assignment for you to do.
Use cash for a week then compare your experience versus when you are using your credit card. You will soon realize that there is a feeling associated every time you spend cash because it is depleting. As your stack of cash gets depleted, the urgency to conserve increases!
This is not true for a credit card. You can tap all you want yet your credit card will not shrink in size. There is no sense of danger that your savings is dwindling. Even if you don’t have money in the first place, you still spend because there are no ques for you to stop.
Part 4: Pay Your Debt
Congrats! Buy now you should be familiar with how much money you make and how much money you save. I am also hoping that you have adjusted your spending habits to free up some cash so you can pay off your debt. Also, I expect that you have cut your credit cards so you can start filling up your bank account without the danger of a leak.
In this part of the lesson, I will show you 2 types to pay your debt.
Debt Avalanche Method
The method wants you to determine which debt you are paying has the highest interest. Once determined, you will have to pay that first. As for your other debts, you will need to pay only the minimum payment so you can use all your extra dollar to pay off the loan with the highest interest.
This method is the most efficient mathematically because you are trying to let go of the debt that has the highest negative financial impact.
This method asks you to rank your debt from the biggest to smallest, then it asks you to pay the smallest first regardless of how much interest it has.
This is very effective psychologically because there is a sense of victory that you feel every time you pay off your debt. You will have more confidence in your ability and in your personal finance every time you pay off your debt which will help you eventually pay off your larger debts.
There are no shortcuts to pay off your debt quick! Budgeting is like getting fit or being able to talk on stage. You need practice and lots of it. A lot of people don’t succeed in what they want to do not because they don’t know their practice routine or how to practice. They fail because they don’t have the right attitude to practice.
In budgeting, you need to develop proper behavior and attitude, apply the right method, and show dedication and patience till you pay off your debt. Getting out of debt is not a one-step journey, it is a marathon that you need to endure doing until you cross the finish line!
What do you think?
So friends, what do you think about this article? Is it helpful or not? Which one do you disagree? What methods do you think can be better?
Please leave your thoughts below!
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