The amount of people suffering from debt is at an all time high, the numbers tell us that almost everyone has debt. Student loans, credit cards, mortgages, car loans, debt consolidation loans, and small business loans- they all add up to huge amounts of debt. I have debt, and I know just from the statistics, that you probably have a large amount of debt too.
As of July 2015, in total the American public owes more than 11.86 trillion US dollars in debt, and just to put that figure into perspective, the American GDP is about 18 billion. That means that just the citizens of the United States owe around 500 times more than the entire US economy produces in an entire year, or in years, it would take all the money from the US economy 500 years to pay off our consumer debt.
With all this debt, it seems like the lending companies should just forgive everyone and let us all start over right? Sure, that would be nice, but the only way you can get out of debt is with a solid action plan. So I put together a plan that anyone can use to figure out what to do about the debt in their life.
See Also: How to Erase Your Debt
1. Figure out how much debt you have
The first step in any debt repayment plan is to figure how much and what kinds of debt you actually have. The most common types of debts are credit cards, student loans, mortgages, car loans, and personal loans. Tally up all of your current debts and figure out how much you really owe. You can even use CreditKarma to create an account and see your credit score, and there is an option to see all open credit accounts.
2. Figure out the numbers and details
Next, you need to take a look at each account and figure out what late fees, penalties, and interest rates apply to each account. If you don’t know the answer, you can find this information on Credit Karma, or you can contact the lender directly and find out what interest rate your loans currently have. Many types of loans and accounts may apply what is called a penalty APR where your interest rates increases if you miss a payment or payments, so be sure to know what your current interest rate is.
3. Prioritize your debts and payments
The next step is to take a look at the bigger picture of all of your debt and figure out what interest rates apply to each account. Using a look at the bigger picture for context, you need to plan your repayments based off the importance of your loans.
Things to consider:
-It is always a good idea at this stage to find professional help if you are seriously in debt. You can visit https://www.usa.gov/debt or https://www.nfcc.org/ to find professionals in debt relief and credit counseling.
-Always try to pay your monthly payments, even if you can only pay the minimum, late fees and penalty fees can add even more debt to your load.
-You should generally pay off the loans with the highest interest first (usually credit cards).
-Student loans can often be placed into a deferment period (a period of non-payment where you are excused from making payment due to financial hardship)
-If you have a mortgage and you want to keep your house, make sure you pay your mortgage first.
-Talk to all of your creditors and let them know your situation, ask to speak to a manager and let them know you want to repay, but they may need them to work with you. Many times banks are willing to work with you on payments or set up payment plans for old debts.
-You cannot declare bankruptcy on student loans, even if you can’t afford them, they aren’t going anywhere, and the government can garnish your wages to get their money, so try not to ever let these go into default.
-Look into getting a debt consolidation loan. Sometimes accounts like credit cards can have 15-30% interest rates. But a debt consolidation loan can reduce your interest rate down to 5-10% if your credit score is still ok.
4. Create a monthly budget and plan all of your income and expenses
Figure out how much money you have coming in each month and set a monthly budget. Look at what your set income is each month, and then take a look at what expenses you have each month. Next you need to take a long and hard look at your expenses and figure out what things you can start cutting out.
During times like these, you may need to cut eating out at restaurants from your budget. Remove things like seeing movies or going to the gym, you may even need to set a strict monthly budget for home food costs and stick to it no matter what.
Take a look at how much your minimum monthly payments are for all of your debts and total them up.
Next subtract your monthly set expenses (including your minimum monthly payments for your debts), from your total income. You should immediately start making extra payment to the principal balance for your highest APR (interest rate) accounts with any money left over, and for the love of god, stop using your credit cards! Cut them up, burn them, or put them down the garbage disposal, but no more credit cards until after you have caught up again.
5. Cut out expenses you don't need, and work extra if you can
As I mentioned earlier, debt repayment isn’t a fun and easy process. It takes serious sacrifices in order to get on even ground again. That may mean not doing things you enjoy, not buying things you need, or just living without certain things you want. You want to lower your monthly expenses as much as possible, even if that means trading in your new car (at a loss) to downgrade to a much cheaper used vehicle.
If you work in a job where you can get extra hours or overtime, do it. If you have weekends free to work an extra side job, do it. If you have the ability to get freelance work, even if it is mowing lawns after work, do it. You may be in debt, but you don’t have to be a slave to it forever, and you don’t always have to declare bankruptcy either. It may take some effort, but you can dig yourself out of debt one month at a time.
You may truly need to enlist the service of credit or debt counselors, you may need to apply for a debt consolidation loan, and you may even need to declare bankruptcy. But your debt can be managed with the right steps and the right actions. Most of us are not so far under that we have to resort to bankruptcy, but most people will need to alter their lifestyle in order to get their debt under control.
Debt accumulates when we live beyond our means for too long. Taking out loans to pay for things that we can afford is ok and builds credit. But taking out loans or running up credit cards to buy things we don’t need is a huge mistake. Debt doesn’t have to cripple us if we can create a good plan and stick to it. It will mean making sacrifices and living without some things that we are accustomed to, but your life depends on it.
What do you think? What things have been successful at getting you out of debt in the past or are you currently using a debt repayment plan to get out of serious debt? Share your experience below in the comments section and let others learn from your experiences.