A report from the Globe and Mail revealed that the number one financial resolution is paying off debt. While many people would love to simply pay their bills and be debt free, that's not often the case.
The truth is that most people aren’t sure of the best way to go about getting rid of their debt, or exactly where to begin. The good news is there really isn’t any one “best way” or "special formula" that works perfectly for everyone, so don't beat yourself up if you've tried and failed in the past. On that note, here are ten suggestions to get you started. The more of these you can apply, the faster you will get out of debt.
1. Pay More Than the Minimum
Make sure that you always pay more than your minimum payments. If you only make your minimum credit card payments each month, it can take forever to pay off your balance. If you want to pay off your balance quickly, pay as much extra as you can afford. Every little bit helps, even if it’s only an extra $20 each month.
2. Spend Less Than You Plan to Spend
Most of us have wishes and wants that are bigger than our pay cheques. You might have heard the saying, “You can have almost anything you want; you just can’t afford everything you want.” Many people get into debt and stay in debt because they tend to buy what they want, when they want. The simple trick to avoid over spending is this: If you want something, don’t buy it unless you can afford it without putting yourself further into debt. Instead you can use the money you save to pay down your current debt, and by the time its paid off, you’ll likely have new priorities and won't even purchase what you were debating to buy months beforehand.
3. Pay Off Your Most Expensive Debts First
One of the smartest strategies for getting out of debt is to make minimum payments on all of your debts and credit cards except for one. Choose the one debt that is charging you the most interest and focus all of your extra payments on paying that one off first.
Once your first, most expensive debt is paid off, take all of that money the you were paying on that first debt and focus it on the next most expensive debt. Continue this method as you pay down each of your debts, and you will be left with your least expensive debt to pay down last. This strategy will get you out of debt quickly, and you will feel encouraged as you see your progress. So the saying goes, “one step at a time.”
4. Consider Becoming a One Car Household
If your family has two cars, consider getting rid of one and either walking to work, taking transit or car pooling. You can save yourself thousands of dollars a year by only using one car. If you use this money to pay down your debt, it will make a big difference. Instead of going cold turkey and selling your second car right away, test drive this idea first. Try parking your car for a while, dropping the insurance down to pleasure use only and see if taking transit, walking, cycling or car pooling works for you. If you do decide to sell your second car, even the odd taxi trip or rental car won’t amount to nearly as much as you would spend on keeping your second vehicle permanently.
If you’re buying a car, you can save thousands by purchasing a quality used car rather than a new one. Plus, the money you save can help you pay off your debts sooner. However, if you do choose to buy a new car, Consumer Reports recommends choosing a reliable car with good fuel economy, and suggests you keep it for 15 years. This will stretch your dollars the furthest and keep you out of debt as you will have plenty of time to save for another new car.
5. Save on Groceries
To save money, try stocking up on groceries when they are on sale, or go one step further and stockpile when they are on sale- this will allow you to skip one grocery trip every month by living off of the food you stockpiled. You can stockpile non-perishable groceries like canned goods, cereal and things that you can freeze like bread and meat. Filling your cupboards when groceries are on sale and then skipping one grocery shop each month can save you up to 25 percent on your annual grocery bill. A family of four could save $2,300 to $2,900 a year by doing this. Applying these kinds of savings to your debts, will definitely put you ahead in the long run!
The key to this strategy is watching for sales, only stocking up when groceries are on sale, and freezing foods properly. When you “skip” a grocery shop you will still need to buy perishable groceries like milk, fruit and veggies, but hopefully you can skip the rest of what you would normally buy. If you can’t skip a shop once a month, then try for once every other month. That will still save you a good amount of money.
6. Get a Second Job
Getting a second job, or consistently picking up an extra shift or two, is a common way for many people to pay down their debt. This doesn’t work for everyone, but if you can make it work, you could be debt free within a short number of years. For this to work, you must apply all of your extra income to debt repayment. Working the extra shifts or hours doesn't need to be permanent. Once your debts are paid off, you can look at scaling back again.
7. Track Your Spending and Identify Areas to Cut Back
For some people, doing this can save them almost as much money as working a part time job. You won’t know how much you can save unless you give this a try. Track what you actually spend—not what you think you should be spending, over the course of a month. If you aren’t honest with yourself in this exercise, it won’t work, but most people are surprised by what they find out about their spending. Once you know your spending habits, you should be able to identify areas where you can cut back. Allocate the money you “find” to paying down your debts.
8. Get a Consolidation Loan
See if your bank or credit union can help you consolidate all of your consumer debts into one loan with one payment at a lower interest rate. This can be a helpful first step in getting your debt paid off. However, getting a debt consolidation loan will only help you if you create a budget that allows you to save some money every month. Savings isn’t usually what someone in debt thinks of first, but if you don’t have savings, you will likely need to reapply for credit cards part way through your loan and then rack up more debt. The end result could leave you worse off than before.
9. Refinance Your Mortgage
If you own your own home, you may have enough equity to consolidate all of your debts into your mortgage. If you don’t have much equity in your home, additional mortgage insurance costs may be expensive. Make sure you consider all of your options and seek advice from an industry expert.
Just like with a debt consolidation loan, when you consolidate debts into your mortgage you also need to create a budget that allocates money to savings. If you don’t, you’ll always be tempted to borrow more when “emergencies” arise. Repeatedly using your home as an ATM can set you up to face retirement with a lot of debt, no assets and no savings.
10. Create a Spending Plan
In short, a budget is just a spending plan. It will help you stay on the straight and narrow with your current debt payments, or your new accelerated payments. A spending plan is something you lay out to make sure that you are spending less than you earn.
Some people say that they don’t like budgets, but have these people ever tried one? Better yet, if you've lived all this time without a budget, how do you know you won't like having one? After trying a realistic budget on for size, most people agree that the alternative—being in debt—is much worse.
The sooner you start dealing with your debt, the sooner you'll have it paid off. The next few years will pass whether you pay it off or not, so start by trying at least one or two of these strategies. You've got nothing to lose, and so much to gain!