In today’s economic climate, how to become debt-free can be a daunting task. With the rising costs of everything, and the decrease in income that come from two working adults one income and one child, household budgets are often hard to predict. It’s no wonder that more than 25% of Australians are living from paycheck to paycheck. Being able to find a way to become debt free is definitely a big plus when it comes to boosting your financial outlook. Here are some helpful tips and pointers:
o Consider a zero-sum budget
When planning how to become debt-free, start with creating a monthly budget that leaves at least some room to live on. Create an accurate picture of your expenses that prioritizes all your options and makes the biggest sense for you and your specific financial objectives. Best of all, some nonprofit organizations are devoted to educating individuals how to become debt free, and they offer low-cost debt consolidation services and free credit counseling.
o Create an emergency fund
You need to take home the reality that in the event of an emergency or unavoidable incident such as illness, injury, loss of employment, or an extended illness, there may be nothing you can do to stave off catastrophe. If you have built up a regular emergency fund through savings, investments, or tax-deferred deposits, the only thing left to do is take home the cash and use it to pay off your bills or debts. A zero-sum budget ensures that you have some money set aside for the inevitable.
o Create a savings strategy
This is a critical step if you want to learn how to become debt-free. Your emergency fund should have enough money set aside to pay off the smallest debt. For those with little income or debt, the goal is to build up a savings strategy that covers the smallest debt.
o Avoid overspending with credit cards
It is not enough to have money saved; it is also essential to achieve financial stability in the long run. If you have a strong, positive credit score, you will have less of a chance of financial trouble or even incurring debt. Debt-free people are more likely to utilize their credit score to make larger purchases (such as a home) and to obtain lower interest rates on loans.
For millennials, check out this in-depth guide on becoming financially stable by Urbanwallet.
o Maintain a good credit score
As you learn how to build up your savings and invest in accounts, your credit score will improve. Eventually, it will stabilize and improve as long as you pay your bills on time. It will take time, however. Once you have consolidated your debt, your credit score will reflect your efforts and you will enjoy the benefits.
Before getting into debt consolidation however, it is better to be informed of what exactly is going to happen. Here’s our article about what you need to know before consolidating your debts.
o Plan for your future
You can’t avoid future debt. Future debt can occur if you buy a house or car without carefully planning for the expenses. Many people do not realize that they must calculate a realistic cost first, including all expected expenses, before shopping for a house or car. Debt elimination strategies should also include taking steps to improve your credit score and reduce your future debt.
o Make a plan regarding debt payments
If you are having trouble meeting your debt payments, make a plan to repay all of them before the grace period expires. If you take home some extra money each month while repaying your debts, you can save money for other necessities. You should also consult with an expert, such as a debt settlement company, to help you better plan out your payments and make the necessary adjustments to your budget, which will lower your debt burden.
One method of paying debt that can be quite useful is the snowball method, a Harvard-based technique which prioritizes smaller debts before moving on to the higher ones. Read more about it here.
If you want other options for eliminating debt, you can also try the avalanche method. Here’s an article by Investopedia comparing the two options’ cons and merits.