Once you have fallen into a great deal of debt, it’s quite easy to start panicking. Don’t do that! There are very solid ways to get out of this predicament. It will take some time and effort and some serious cutbacks, but it’ll be worth it. There’s no joy to be found in owing wads of money.
If you want to clear debt by yourself, the best technique I can provide you with is debt snowballing. This is best summarized as paying off your debts with increasing amounts of surpluses. I’ll tell you how to do this.
First you take a good look at your finances and make a list of it. What is your total monthly income? Don’t just put down you job’s income, if you have other sources. Put down every scrap of income you have.
Next you dot down all the your monthly expenses that are vital. A good way to keep track of this is by keeping a spending diary for a month. Your vital expenses are food, water, gas, electricity, etc. Eating out isn’t a vital expense! If you want to be able to clear debt, you will have to let go of these luxuries for now.
Finally you will list all your debts. You list the debts, the interest rates, and the monthly minimum payments. Now there’s two ways to start attacking these debts. The least expensive way to debt relief is to go after the most expensive debts first. The most expensive debts are the ones with the highest interest rates. These are the debts that grow the fastest, and tackling these first will save you the most money over time.
Another way is to tackle the smallest debts first. The major benefit of this approach is more of a mental one. It will provide you with some quick wins when you cross off a couple of small debts of your list. This will give you some emotional momentum to keep going with the snowball technique. Dave Ramsey, a famous American financial TV personality, says that personal finance is 20% knowledge and 80% behavior. By crossing off the smallest debts, you’ll see some quick results, and those wins will keep you motivated.
Now which method you choose is completely up to you. On the long run the former is better, and on the small run the latter probably is. If you feel like you’ll be able to stay motivated regardless, I would definitely pick the former method though. For this example I will use the method of paying the most expensive debts first.
Now on to snowballing. The idea behind this is that with each debt you pay off, you surplus increases, which will give you more money to pay off the next debt. First you take you expenses + combined minimum payments, and subtract those from your income. Now if you’re lucky, you’ll have a bit of cash left. This is your surplus. Don’t start thinking that this is extra money you can spend! You don’t want to be just paying of the minimums! Read this article on clear debt solutions to understand why.
You’ll add this extra surplus to the minimum payment of your most expensive debt. This will make sure you pay it off as fast as you possibly can.
After a few months you’ll have succeeded in paying it off, and your surplus will be your old surplus + the monthly minimum payment of the debt you just paid off. You’ll add this new surplus to the monthly minimum of your now most expensive debt.
Then, when you’ve paid off that debt, your surplus will have increased again. That is basically how it goes. With each debt paid off your surplus increases, and gives you a greater amount to spend on the next debt.
I am very confident that this is the fastest way to handle your debts if you’re refused a consolidation loan. With each paid off debt your momentum will rise, and with it your spirit. I promise!