To get out of debt, it helps to break the problem down into small, achievable steps instead of looking at it as one big, unsolvable issue. List out any hardship or reason that caused you to be in debt and take small actions to overcome each adversity.
Problem: You don’t know where your money goes.
Action: Are you making most of your purchases with a credit card or debit card? If so, log into your online account and track your purchases to see what you’re spending on. On a monthly basis, add up all your costs and allocate them into different categories: groceries, rent/mortgage, utilities/maintenance, transportation, entertainment, shopping, etc. Also decide which of these expenses are fixed costs, such as rent/mortgage that cannot be easily controlled, and which of these expenses are variable costs, meaning you are able to cut costs.
If you use cash instead of a credit card or debit card, you will have to manually list and track what you spend for a month to get this information. It helps to have a notebook and at the end of each day, write down how much money you spent that day and what you spent it on. At first, it may be annoying to write down everything you paid for, but this is a key step to getting out of debt. You’re in debt because you spent money you didn’t have, and often times it is due to multiple purchases as opposed to one single, huge purchase. Each day for at least one month, write down every penny you spend, no matter how small.
Problem: You know what you’re spending on but you’re just spending too much.
Action: It is easy to get caught up with all the advertising and spend your way into happiness. Realize this trap and distinguish between your “needs” and your “wants.” Your “wants” include new outfits and dining at fine restaurants, which rarely make us happy in the long run. Splurging often will mess up your budget and prevent you from reaching financial freedom. Instead of eating out all the time, look up recipes online and refine your cooking skills. If you are short on time, cook a big portion that can last you for more than one meal. If you are living with other people, try taking turns cooking.
Problem: You’re only spending on the necessities but you’re still short on money.
Action:If you are only spending what you need and you’re in debt, this probably means you’re not making enough income. Look for ways to increase your income a little bit at a time. If you already have a regular job and want to make money on the side, you can try short-term freelance jobs. Websites like Elance.com and oDesk.com offers jobs that allow you to work from the comfort of your own home. You can get paid for a number of things, such as writing and designing. You just need to research and find the right opportunities.
Problem: You’re spending too much money on your credit card.
Action: Examine your spending behavior. People tend to spend more when they use credit cards. Do you find yourself spending more when you carry your credit card around? If so, leave your credit card at home and use cash. When you pay cash, you can “feel” the money leaving you as opposed to charging away on your credit card, not thinking about how much you will need to pay later on.
Problem: You don’t know which debt to pay off first.
Action: If you have several credit cards and debts like student loans and medical debt, it can be confusing to figure out which debt to pay off first. In order to save yourself money, you want to pay off the debt that has the highest interest rate first. By doing this, you can avoid unnecessary and excessive interest charges. Also, see if you can obtain a lower interest rate by calling your lenders and asking for a lower rate. If they say no, you should look into balance transfer options or getting a consolidation loan. You can save a lot of money by lowering your interest rate.