Break Free from Debt: A Professional Guide to Financial Freedom
Debt can feel like an overwhelming burden, but it doesn’t have to define your financial future. In a previous blog, “The Truth About Debt: Why It’s Holding You Back” I talked about how debt can limit your ability to save and build wealth. That is why I believe breaking free from consumer debt and keeping other debt manageable is key to your financial freedom. Tackling your debt requires strategy, commitment, and knowledge. Let’s talk about effective strategies that can help you pay off your debts, reduce your financial stress, and get you on the road to financial freedom.
Key Considerations Before Creating a Plan
Emergency Savings: Before focusing solely on debt repayment, ensure you have a small emergency fund. This helps prevent taking on more debt if unexpected expenses arise.
Do not incur additional debt: While on a debt paydown plan, you cannot incur additional debt. This only derails the plan.
Create a budget: Before outlining a debt paydown plan, I recommend you create a detailed budget. You will want to look for areas to reduce or eliminate spending to free up additional funds to put towards debt. Therefore, you need to live BELOW your income.
Debts with Consequences: If you have debts like back taxes, child support, or mortgage payments, prioritize those, as they can result in more severe consequences (e.g., legal action or foreclosure) if left unpaid.
Non-Essential Debt: If you have any non-essential debt, like credit cards or personal loans that don’t impact your basic needs, those can typically be tackled after the more urgent debts.
First: List All Your Debt Details
The first step in tackling debt is understanding exactly what you owe. Create a comprehensive list of all your debts. This will give you a clear picture of your financial situation and help you plan. Here’s what to include:
Creditor’s Name: List the name of the creditor for all your debts.
Type of Debt: Identify the type of debt as credit cards, auto loan, personal loan, student loan, medical bill, or mortgage.
Total Balance Owed: List the total current balance owed for each debt.
Minimum Monthly Payment: This will change as you pay it down. For starters, list the current minimum monthly payments.
Interest Rate (APR): The interest rates is crucial, as it will play into the paydown strategy.
Current or Past Due: Note if the debt is current or past due.
Credit Limit: List the credit limit on any revolving loans.
Pro Tip: I recommend reviewing a current credit report to make sure you have captured all accounts and there are not any surprises lingering out there. You can get your free credit report at https://www.annualcreditreport.com/.
Second: Negotiate with Creditors
The next step, if you have a large amount of debt and little ability to aggressive pay it down, I recommend negotiating directly with your creditors. Many people don’t realize that creditors are often willing to work with you to make your payments more manageable, especially if you have faced a hardship. Here’s how to do it:
Contact Your Creditors Early: The sooner you reach out, the better your chances of negotiating terms. Creditors would rather receive something than nothing.
Request Lower Interest Rates: If you’ve been a reliable customer, ask for a reduced interest rate to make your payments more affordable.
Ask for Settlements or Payment Plans: In some cases, creditors may accept a lump sum payment that’s lower than what you owe, or they may allow you to set up a more flexible payment plan.
Explore Hardship Programs: Many companies offer hardship programs for people facing financial difficulties. These can include reduced payments or delayed due dates.
Third: Should You Consolidate Your Debt?
If you have multiple debts, you can consider consolidating them into a single loan and one monthly payment. This can help simplify your finances and reduce stress. However, you want to make sure you analyze this carefully and run the numbers both ways. You want to make sure you get a lower interest rate and consider the new term (length or number of payments) of the consolidation loan. Also, remember it will likely impact your credit score temporarily. Most importantly, you need to change your behaviors so you don’t turn around and incur more debt.
Fourth: Chose a Paydown Strategy: Snowball, Avalanche, or Blizzard?
When it comes to paying off debt, there are several methods you can use. Each strategy has its strengths, so it’s important to choose the one that works best for you.
Debt Snowball Method: You put as much money as possible to the smallest debt, while continuing to make minimum payments on the other debts. Once that’s paid off, you move to the next smallest, and so on. The snowball method is motivating because you have quick wins and see progress. It also increases your confidence so as each debt is eliminated, you build momentum and feel empowered to tackle larger balances.
Debt Avalanche Method: This approach focuses on paying off the debt with the highest interest rate first. High-interest debt, such as credit card balances, can quickly accumulate. Depending on your balances, it may take longer to see progress, however it reduces how much you’ll pay in overall interest.
Debt Blizzard Method: Another method is called the blizzard method. You pay off your debts in a specific order for reasons that make sense for you. Maybe you owe a friend some money and you would be relieved to check this off and improve the relationship. Maybe there are a couple smaller debts you want to knock out first then switch to one with a higher interest rate or higher balance. This method can provide a balance of relief, motivation, and financial efficiency. I still encourage you to run the numbers different ways so you understand the impact on timeframes and overall interest.
Conclusion
Getting out of debt takes time and commitment. Remember, every payment brings you one step closer to your goal. If you find yourself feeling overwhelmed about your debt and want help creating a personalized plan, please contact me. Email me at riverbendfinancialwellness@gmail.com or visit www.riverbendfinancialwellness.com to learn more.