The idea of getting out of debt can be one of the most intimidating aspects of your life. Where do you even start? Everyone has their friendly advice for you about debt although they aren’t debt free themselves. As someone who once felt debt would always be a part of my life, I can tell you that it is possible to be debt free just like we are now. If you want to be debt free take this first step to get out of debt.
The First Step Towards Debt Freedom
The first step to get out of debt is to know your numbers.
Seems simple, right? Too simple maybe? Well, there’s no catch here. This is about giving you control over your situation.
How are you going to formulate a plan if you don’t know the numbers? If you think about it, this step is critical because it is the foundation of your debt payoff plan. Being thorough about all your numbers will help you move forward on solid footing.
Off the top of your head, can you tell me how debt you have? How many loans do you have? What is your monthly income? And how much do you spend per month? What are the interest rates? What are your minimum payments?
Don’t be overwhelmed. You got this!
Debt As A Mental Hurdle
Have you built up the amount of debt you owe in your head to be worse than it really is? It gets so easy to ignore it and make more out of it than it is. Just making the monthly payments will keep it on the back burner. Thinking of it as only a payment is what gets us into trouble.
This is what we need to prevent. It is time to take action and stop letting it weigh you down mentally.
From here on out, you will take the power back and stop letting debt control you.
Otherwise, the longer you wait to tackle your debt, the more you will pay in interest and reduce money making opportunities.
Know Your Numbers
The first part of knowing your numbers is to add up your debt.
So, what type of debt are we considering here? We are looking at all non-primary mortgage debts. Yes, this includes that car payment. That was a surprise to me as I use to not think a car payment was debt for some reason.
Here are the types of debt you should include in your total debt number.
- credit cards
- student loans
- car loans
- medical bills
- IRS debt
- personal lines of credit
- second mortgage
- rental property
- personal loans from family and friends
How We Paid Off $107K Of Debt In 33 Months
Our first step when tackling our debt was to do just this. Add up our debt. We didn’t know how much we owed but we knew it was a lot. We didn’t know the exact amount but we realized it was critical for us to do so.
I can still remember that moment like it was yesterday. At that moment of adding it up it seemed like something had changed in the air. I truly felt as though we had switched from debt being a thing that was always in our lives to something that we could conquer.
We logged into each account to see the balance, interest rate and minimum payment. Then we put each into a spreadsheet and totaled it up. At that point, we were on our way to debt freedom.
Next, we knew we had some more numbers to figure out. How much could we put towards the debt each month? And how long would it take to pay it off?
How To Budget To Get Out Of Debt
The other part of the equation now that you know the amount of debt you have is to see how much you are spending.
Knowing your income and your expenses will tell you how much you can put towards your debt each month. Also, knowing what your expenses are will start to show you ways you can make cuts.
I know, this is getting to that dreaded ‘B’ word. Budget. How boring are budgets?
Well, you can think of budgets as controlling or you can think of them as a path towards freedom. I prefer to think of them as a path towards freedom and based on experience, they have been.
How do you budget to get out of debt?
- Get on a budget tracker such as Mint
- Write down all your monthly payments
- Review your past expenses
- Identify expenses you don’t need or want and start cutting
- Take the extra money you have and apply it all towards debt
- Grow the gap (income minus expenses) each month
The trick here is to build momentum each month. You’re not going to pay it off all at once. By knowing the numbers though you have more control over your cash and your debt payoff.
I can’t say this enough. Keeping track of your numbers throughout the process is critical!
Establish monthly goals by breaking your debt down into manageable chunks that you can pay off.
We used a debt thermometer to track our debt payoff. Get yours here for free.
You need to know which debts to pay off first. There are 2 approaches. There is the debt snowball and the debt avalanche.
The debt snowball is where you pay the loans with the lowest balance first.
The debt avalanche is where you pay the loan with the highest interest rate first.
This can be a heated argument about which is better. Both can work, but I’m going to let the numbers do the talking. Research shows that those who do the debt snowball are more likely to finish paying of their debt than if they tried another method.
We started with the debt snowball. We then switched to a hybrid method that targeted specific debts we wanted gone. Each time we got rid of a loan we felt more motivated to pay off the next one. By starting with the smallest first we saw results fast and weren’t discouraged in those first few critical months.
The debt snowball gets rid of each debt the quickest. This means results and more money in your pocket the soonest.
Once those loans are gone you won’t want them back. You’ll sleep easier for it.
Take This First step to Get out of Debt
So, the first step to get out of debt is to know your numbers.
These numbers include:
- Your total amount of debt
- Total number of loans
- Amount of each minimum payment
- Your monthly income
- Your monthly expenses
Now that you know those numbers you can do the following.
- Make a budget
- Track your expenses
- Pay off your debt using the debt snowball method
To help you with the other steps we have our 6 simple steps to get out of debt. Also, you will face frustration along the way. For that, we have these 14 easy ways to stay motivated during debt payoff.
Now that you have taken this first step you are in control. You are now able to take your life back away from this ugly monster known as debt.
Onward and upward!