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5 Steps to Getting Rid of Your Debts

Credit cards are the most common cause of new debts

In the article about How Debt Works, we were talking about the start of the vicious debt cycle and how people get themselves indebted. In this article, I will show a few steps that can help you organize and pay off your debts. Here we go! 

Step 1: Understand the Size of Your Debts

The first step you need to take in order to get out of the debt trap is to realize the situation you are in and how your actions have led to it. It is absolutely necessary to understand that this is unsustainable in the long term and that you simply cannot live your whole life like this. If you are reading this article, then this means you are probably already taking this essential first step, and you are already aware of what is going on with your life. That means you are off to a goof start. Now you need to understand the size of your debt problem so that you can work to solve it. 

So, let's do exactly that. You will have to learn some basic accounting and make a balance sheet of sorts. From one side you should fill in all your assets and income, or essentially, what is generating money for you right now, or what you could sell right now to get money. From the other side you will need to fill where this money is being spent, and the overall sum you will need in order to cover the hole completely (that is, paying off all your debts). 

It sounds like a Herculean task because it is, especially if you never cared to examine your finance so closely before. It might be quite hard to find out all the information you require in order to finish your balance sheet. 

During this point, you might feel like it's really not necessary to go through this detailed examination of your financial life. You might hear a little voice inside your head telling you that you don't really want to know how much you owe. Ignore it, and keep doing it. It is critical to face your fears and look at the total sum so that you can start working on your exit strategy. 

You can start by looking at your current account debts and check which payments are going out and to whom. Start filling this information in the table. Then move on to your credit card loans. Start checking how much each credit card is taking away from you and why. 

Step 2: Start Categorizing

Now that you went through the immense task of finding out all about your debts, where they come from and how much they are actually costing you, can start dividing them into different categories.

Some debts might have a higher importance to your long-term goals, such as a mortgage or your student loans because you needed the education and having a house can be a good investment. Other debts have less meaning to your life objectives in the long-term, such as traveling, clothes, and smaller purchases that keep draining your credit card limits.

Pro-tip: You can frequently renegotiate loans such as mortgages, so try calling your bank or agency and ask if they can offer you lower rates. 

These debts are where you need to focus your attention right now. If you can divide them into subcategories, it's even better. Start catching these bad guys and assigning them to different categories. Later on, you will have to start making decisions on which debts to pay off first. 

Step 3: Divide and Conquer your Debts

Now that you are done assigning your debt to different categories, you can go on to the next step, which is to giving them different priorities. While you were making different categories according to the subjective value that your debts might have, prioritization has a much simpler rule: Just choose the debts with the hardest bites. And by that, I mean the interest rates you have to pay by continuing with these debts. While this may vary from country to country, as a general rule, the interest you pay on your credit cards is often the highest, especially if you have the habit of missing payments. 

You should, of course, make your own independent research on all the items from your previous balance sheet. You might find out that a mortgage or particular loan is eating up a lot of your money. 

Step 4: Paying Down your Loans

This might be the most difficult part yet. It might take quite a lot of time, too, so you need to have discipline and resist the urge to give up and go back to your previous life of unhinged spending.

A good way to start is to consolidate several debts into one single loan with a lower interest rate. This will also save you some time as you will be making one single payment instead of many. This will make things simpler for you because you will have a clearer view of how much exactly you need to pay to reach your financial freedom. 

If you are up to it, try researching an interest-free credit card and using it to repay your debts. Be careful not to miss payments on the new credit card, though, as it will likely cancel any interest-free benefits they might have. And, if you are doing this, it might be a good idea to throw away those cards you just paid off. You don't want them tempting you, right?

Another way to start paying down your debts is to focus on the ones with the higher interest rates and keep the minimum payments on all other debts you might have. Once you are done with the biggest monster, things will start looking much better, so use your newfound confidence to target the next biggest drain on your paycheck and focus on it. One by one, you will see yourself getting rid of the debt trap, and you'll do it faster each time you finish. It is critical to not give into the temptation of making new debts once you feel safer, though. If you have to, make sure it's for something worthwhile, and not just more clothes or a new car. 

And speaking about cars, you should also probably sell your car, if you can use the money to pay off your car loan and get a bit extra on the side. Depending on where you live, you might find out that taking the bus or subway is a good option, or if you really need to, buy a cheaper car instead. 

You will eventually realize that paying off these debts is very satisfying, and with each debt gone, you will feel that you are building your financial freedom step by step. 

It can be hard at times, though. You might feel that it is very difficult to resist using your credit cards and to save money instead of spending it, but every time you feel a craving for this, just remember why you are doing it. Remember the feeling you get when you see your bills and remember why you started it. Your financial freedom might cost you time and money, but it is priceless. 

You can also use this period as an opportunity to find new pleasures in life. Sure, eating in a restaurant with friends is tempting, but you might find out that cooking at home isn't just a boring shore, it can be a great, delicious hobby. Riding the bus or subway to work allows you to catch up on your reading. Doing and learning things by yourself instead of buying solutions can be a great way to unlock new skills too, and you might suddenly find a way to earn money with them. 

Congratulations! You got yourself out of your debt trap after long, dedicated effort. Your debts are finally gone. You will find yourself wondering what is next. 

Step 5: Learning to Invest

This is a great time to start setting up an emergency fund. Why do you need this? Your emergency fund will help you go through a rainy day without any bigger worries. When you were struggling with all your debts, losing your job and being unable to pay them off seemed like a catastrophe, right? Now, without debts it sounds less of an emergency, but still not great. An emergency fund is the additional guarantee that even if you lose your job, you won't be just one paycheck away from a disaster. This is why your rainy day fund should be enough to cover from three to six months of your expenses.  

Once your emergency fund is set up, you can start learning more about investments. If you don't know where to start, I suggest you learn about low-risk investments such as bonds and obligations. The higher the risk, the higher the returns, so make sure you research your options to get a balanced portfolio. 

Consider a paid consultation with a financial advisor so that you know which are the most accessible options in your country. 

Achieving Your Financial Freedom

There you go. Now you are not only debt-free, but also on your way to earning money from investments. Depending on your goal and situation, it can take a few months or a few years to become financially independent. Nevertheless, with patience and discipline, you will get there, and if you have difficulties on the way, remember that the stress and anxiety your debt is causing you costs much more than whatever things it can buy. 

Living a life free from debt is a much healthier choice and makes much more sense in the long run. The sooner you make the decision and start to act on it, the sooner you will be financially independent, educated, and free. 

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