Getting out of debt is neither fun nor easy, but it is doable step by step.
Step 1: Gather the details
To become debt free the first thing to do is understand your problem. It’s common to have multiple sources of debt, so you will want to list them out and see exactly what you’re dealing with.
Pen and paper, excel sheets and financial apps like Money Dashboard can help you get this overview.
Here’s what you want to determine:
- All sources of debt
- Total debt for each
- Minimum monthly payments on each
- Interest rates you are paying
Step 2: Create a budget
Your next step is to find out how much debt you are capable of paying down every month.
It is very helpful to use an app like Money Dashboard. This free app can connect to your bank and credit accounts and tag any income and outgoings like bills, food shopping and rent/mortgage.
Use this overview to mark your “essential expenses” like mortgage, council tax and other bills. After subtracting this from your income, you will see how much you have left over each month to go towards paying off debt.
Of course, you probably have a few non-essential expenses as well. It is okay to enjoy luxuries, just make sure you do so within reason. Look for any spending areas that you can cut down and set strict budgets by categories (like shopping and transport).
Your goal is to make a budget plan that leaves you with more income to put towards your debt. Every bit counts.
Step 3: Make a debt repayment plan
Now that you know how much debt you owe, and how much you have available to pay back that debt, it is time to make a repayment plan.
Prioritise paying off debt with the highest interest rate. (Determining which debt that is will be part of step 1). Once you pay off the highest interest debt, move on to the next highest.
If possible, make sure you are making the minimum payments on all other debts, especially for the high interest debts.
Consider if a debt consolidation loan is suitable. This will bring all of your sources of debt into one loan, which you pay back month over month at a reasonable interest rate. For many people, this is a far more manageable approach than multiple debts. Be careful not to miss any of your regular monthly payments.
To pay off credit card debt, consider a 0% balance transfer card. This also consolidates numerous debts into one. With a 0% balance interest rate, you do not pay interest on the balance transferred over, which can be a huge relief, and helps you focus on paying off the debt itself. Your 0% rate can be compromised by missing a payment, and may only be valid for a couple of years, so be sure to budget to pay off all debt before the offer expires.
Step 4: Avoid falling back into debt
Becoming debt-free can be a long process, and it is important you stay on track. If you want to continue getting out of debt, consider this your essential checklist:
- Meet minimum monthly repayments by factoring them into your budget
- Once you’ve paid off your credit card debt, close your credit card accounts
- Create an emergency fund
If you need more help and are feeling overwhelmed, you can get free debt advice. Contact an agency like the Citizens Advice Bureau, which can suggest alternative approaches and help you customise your path to becoming debt free.