By now, you must have learned that cutting personal debt is easier said than done. Going at it alone without any help is even more challenging. Some basic guidelines go a long way to help you achieve your goal. Remember, to be financially independent, you must first strive to be debt free.
To improve your money management skills, you must first begin by evaluating your financial situation. Revisit and reflect on how you have spent money in the past and note down the mistakes you have made. This will allow you to create a clear plan for how you can reduce your debt burden and ultimately get free from it.
The journey to financial freedom begins by having free money that does not go into paying a debt.
Here are a few tips on how to get back on track when you have fallen behind financially:
DO keep a record of all your expenditure.
This habit will help you track where the money you earn goes to. Most of us have poor financial habits and cannot explain how we spend all of our money. As such, it becomes very difficult to make changes such as cutting expenditure to free more money as we simply don’t have the relevant information at hand. A simple way to start is to keep all your receipts and spend some time analyzing your patterns of spending in a spreadsheet.
DO organize all your debts in the order of priority.
You should prioritize debts such as a mortgage or title loan for your car as they are secured on your property. Next, you can work on paying debts with the highest interest rates. This will save you a significant amount of money in the long run.
DO create a plan on how to spend your money.
In order to balance between your income and expenditure, you must separate your needs from wants and prioritize them accordingly. Start making the changes this month and carry on in order to develop good spending habits in the long term. It does not matter how deep in debt you are if you stick to your new strategy, you will quickly make significant strides towards financial freedom. Take some time off your busy schedule and evaluate your financial situation; you can even seek the help of a financial advisor. These simple ideas will save you from accumulating debt and are more effective than paying a fixed amount at the end of every month.
DO take the time to understand the terms and conditions of your debt.
You must do some research to know the kind of debt you are into – even if it means learning all the necessary financial jargon or unfamiliar terminology. Do not shy away from it; learn and master the necessary knowledge. Understand how interest rates work, and the difference between default and deferment.
DO clear all your outstanding debt.
Use the debt priority list you created to pay off what you owe. The list will inform you of the balance of each debt, the debts with high rates and the number of payments to go. Try to clear each ahead of schedule and proceed to the next one.
DO save a portion of your income.
Commit a workable amount and open a savings account. Most Americans have very poor saving skills – do not be among them. Start saving today.
DON’T impulsively spend.
This is how most people get into debt – buying things they do not need. Such spending includes clothing, entertainment, vacations and other recreation. Studies have shown that a shopper can often spend 35% more when they use a credit card instead of cash to make a purchase.
DO make up a list before you go shopping.
For instance, do not go grocery shopping without a list; otherwise, you will end up spending more than you planned. About two-thirds of Americans are impulse buyers who go shopping without a plan. They spend a lot of time wandering around the mall and end up spending more money than they had planned.
DO cut expenditure.
This begins by tracking your expenses so that you know how much you spend in a week or month. You can them decide to reduce the amount you spend on food in a day or week.
DON’T take on any new inessential debt.
It makes no sense to make minimum monthly payments and then add more debt by making unnecessary expenses. This habit will take you nowhere. It can be compared to making two steps forward then taking three steps backward; taking you even further from where you began.
DO get off the credit card train.
Do not use your credit card to make a purchase that you will not pay at the end of the month. Clear your credit card bill before the start of each month.
DON’T make financial promises you cannot keep.
Most consumers spend more than they can afford and charge it on their credit card. Lenders expect that a borrower will keep their end of the bargain and pay their debt as agreed.
If you can afford to pay back more, DO it.
This will help you to reduce your principal balance much faster. You will also save on interest in the long run.
The journey to financial freedom begins by making healthy changes that help you become debt free. The tips outlined above should put you on that road to financial independence.