We’ve all been there. Things get crazy in life, and you think, “Well, I’ll just put this on my credit card for now. It won’t take me too long to pay off.” Then expenses just seem to keep popping up, and it gets harder and harder to pay off your initial debt, and you may even keep adding to the pile.Well it’s time to stop this downward spiral, and get out of the debt trap. Below are several steps you can take to become debt free.
1) Assess the situation
It’s time to sit down, and take a good hard look at all your expenses (not just your debt). Pull up your bank account(s), any debt that you have, and any reoccurring monthly expenses. Get all this information in front of you and your significant other. Now look and see exactly where your money is going. Create a T-chart with one side for income (what you’re actually taking home) and the other for required monthly payments. This should include expenses that you can’t adjust, like mortgage or rent, the electric bill, etc.
Subtract the expenses from the income and circle this number. This is how much free cash flow (FCF) you have on a monthly basis. We are going to use this to pay down debt along with enjoying life!
Reduce your circled number above (FCF) by your minimum debt payments. Then start listing your “Nice To Have” expenses such as entertainment. After reducing your FCF by minimum debt payments and entertainment. Hopefully you end with a positive number, and your expenses don’t outweigh your income.
2) Set realistic goals with a time frame
If there is money left after reducing FCF for “Nice To Have”s, we can put those funds to work paying off your debt. If not, or if you would like to put more towards debt, cut excess:
For example, maybe you can cut your entertainment budget, and put some of that money towards paying off your credit card. It can be hard to cut back on things like going out to eat with friends, but you can always get creative when finding a way more budget friendly way to hang out, like hosting a potluck at home where everyone brings a dish.
Now that you know exactly how much you want to put towards your debt, figure out exactly how long it should take you to pay off your smallest debt amount outstanding. Once you’ve figured out these numbers, write it down. Congrats! You’ve set your first goal.
3) Take action
Now, each month, you’ll know where to cut your expenses so you can put the money you’re able to save towards paying off your debt! Watch your progress as your debt shrinks. This can really help motivate you to continue paying it off, and keep your debt from feeling overwhelming.
Remember that if you miss one month, that it doesn’t mean you should miss the next month. Don’t beat yourself up if you didn’t reach your goal for one month. If you couldn’t make the full payment of your goal, try and make a partial, and if you can’t do that, just remind yourself that this is a marathon and not a sprint. Building debt takes time, and so does paying it off.
4) Remember you are not alone
Most people are more motivated when they have a partner. Whether it’s at the gym or a group project at work, it can help to motivate you when you’re being held accountable to your goals. Wela wants to be your personal finance partner. Our debt tool will help you write out your goals, and help hold you accountable to paying off your debt. Don’t worry, Wela’s personal financial advisors have seen it all when it comes to debt, and we never judge.
You can sign up for your Wela account here to get started taking the above steps to start paying off your debt today.