How To Become Debt Free - Our Guide
Debt is a common part of someone’s financial history and combating debt on an individual level is as important as ever. With that said, many struggle to find effective tactics to clear their debt and some that do find tactics struggle to implement them effectively. That is why us at Frugalalot have taken it upon ourselves to build you a methodical strategy that gives you the results you need. Read below and learn about our step by step guide to crunching your arrears, and how to become debt free
Step One- The Extent of the Problem
In order for you to understand the best way to work towards clearing your debts, you will need to take stock of your debt. Here is why…
- Firstly, often times when people pay off their debt they actually forget what they are paying for. This is especially the case for longer term debt repayments as people simply pay up every month without realizing what it is they are being charged for.
- Because of this first point, often people have no idea when their debts will be repaid. The monotonous paying off of debt can seem endless, that is why many do not know when their debts will be repaid.
- Some debt repayments may require you to pay off your debts over different lengths of time. Some debts may be paid off monthly while some may be paid off once a week. Often times there are options and you can choose between the two. For you to go about paying your debts off effectively you will need to know when you pay off what debts and how much they cost.
Step Two- How Much is the Commitment?
This next step involves a bit of maths, so get your calculators at the ready.
Next, you will need to work out how much you pay towards your debt over a set amount of time. The timescale that you set here is up to you but a good recommendation from Frugalalot is a month. This is because often times you will pay off your debts monthly, and even if you pay them off weekly, you can scale up the payments.
Once you have this figure, you will need to do some maths- fractions to be precise. You will need to work out how much of your monthly income, assuming you get a monthly pay check, is spent on paying your debts. This will become a mainstay of understanding and working towards becoming debt free.
What is even more useful is if you go a little further and find out what payment takes up what proportion of your expenditure. This will go even further to assess the extent of the problem and to find out which debt is the largest contributor to your overall payment.
Step Three- Budget Accordingly
Here at Frugalalot, we already have an in detail article on the best ways to budget, be sure to check out that article before you read this next step.
At Frugalalot, we like to use the 40,25,20,15 method. This divides your spending into four areas and helps you control your spending. However, is there a way that we can change this method so that it accommodates someone trying to learn how to become debt free? Well, the answer to that question is yes, there are ways that we can change the budget in order to fit in the extra expenditure- however, it will mean some sacrifice.
One way you can change the budget is to actually include your debt repayment, or the most pressing debts, in the essential 40%. This will mean that you always pay off at least some of your debt every month, therefore, putting you on the path to becoming debt free. However, if you do choose this kind of method then you must note that you will need to sacrifice some money from somewhere in your budget in order to pay the debts. There is not a way around this and that is just the reality of carrying debt.
If you wanted, then you could create a whole new area dedicated to paying off debt. By using step two, you will know how much you have to pay per month in order to satisfy your debts. With that in mind, you could create a budget that uses the precise percentage to make sure you never miss a payment.
Step Four- Do Not Add to the Pile
An important thing to remember is that you should not add to the debt pile while you are trying to clear it. Often times debt is rebranded as something else, such as a repayment plan or a loan. However, these are all the same thing and you must not get drawn in by persuasive advertising or promises by the seller.
Debt can be avoided by cutting down on costs and avoiding unnecessary purchases. It is vital that during the period of time when you are paying off your debt you commit to it and do not waiver, as spending without consultation or without following your budget will only delay you becoming debt free.
As talked about in our budget article, something that we would highly recommend generally and specifically about this topic. To stop you from acquiring debt, you could use the 24-hour method. If you ever consider the need for debt, whether that be help buying something or before you are about to buy something that may make debt repayment hard, wait 24 hours before you buy it. The majority of the time, you will have gone off the idea and you can bypass the impulse.
Step Five- Oh No, I Have Missed a Month
This step is very similar to one of our steps on our budget article, however, when it comes to debt, missing payments can have some rather nasty consequences. Here are some…
- Sometimes, the debt that was missed might just be passed to next month. This will mean that next month’s payment will be larger than usual and you must account for that in your budget for the next month. In comparison, this is one of the easier consequences of missing a debt repayment.
- Almost all debts carry interest rates, and if you miss a payment then you might see these change. This change in interest rate will mean that every payment that you make after wards will be larger and you will need to budget that in to make sure you can still pay off the debt.
- You may receive a warning letter as well, you about any missed payments in the future. Some companies will let you buy appliances and other products while paying for them over the span of a number of weeks. If you miss payments, then they may have the right to remove the product.
- Another consequence of failing to pay off debt will be an affected credit score. A credit score is what banks and lending institutions will use to decide whether you apply for a loan. A higher credit score will allow you to take on future debt like a mortgage while a lower credit score will struggle to get a mortgage with some banks.
Step Six- The Future
The future is a mysterious thing and is something that even Frugalalot cannot predict. However, we can give you a few pointers about how debt free future would look. We will start with the most obvious…
- You will have some money left over. If you do choose to set aside some money from your budget to pay off that debt, then once you have paid it off then that money becomes free. Of course, Frugalalot would suggest some kind of investment, but you are free to spend it however you wish.
- Another underappreciated issue with debt is the mental strain that it puts you under. Those who have sizable debt are far more likely to struggle with their mental health than those who do not. Clearing your debts is a stride in the right direction- for the health of your finances and for the health of you.
- As mentioned above, your credit score and paying off debt are linked. It does mean that if you fail to pay off debt then your credit score will go down, but it also means that if you consistently pay off your debts then your credit score will increase. This will give you access to debt in future such as mortgages and car loans.
Our Final Thoughts
Advising you on how to become debt free is something that is very close to our hearts at Frugalalot. This topic is very important to understand fully because almost everyone will encounter debt at one point and understanding how to deal with it is vital. If you have any questions then just ask us and we will gladly help.