Loans, mortgages, credit cards — debt can come in many different forms. If you have debt, you’re not alone — 8 out of 10 people have debt of some sort, according to Pew Charitable Trusts. U.S. households with debt have an average of $130,922 in total debt, with $15,762 of that being credit card debt. Those households pay about $6,658 in interest each year.
While alarming, you can help lower those statistics if you learn how to pay off debt quickly. It takes hard work to eliminate those credit card balances and pay off loans, but the rewards come in the form of financial freedom and lower stress, thanks to the increased cash flow. Changes to your budgeting and spending can help you get to that debt-free lifestyle without completely sacrificing comfort in the meantime.
1. Create a Monthly Budget
Think of a monthly budget as your blueprint for building a stronger financial future. Without a budget, you are more likely to spend extra money on things you don’t really need. Controlling that extra spending to put more money toward paying off bills helps you get out of debt much faster.
Budgets can also help you avoid accumulating more debt. Without proper budgeting, you may run out of money before the end of the month. When you need groceries, have utility bills to pay or acquire another essential expense, you reach for the credit card. Your debt increases instantly, and you pay more in the long run by accruing even more interest if the balance isn’t paid immediately.
You need a few key pieces of financial information to begin a budget. Your total monthly income and total monthly expenses get you started. Bills and fixed expenses are easy to calculate. Entertainment, groceries, food, clothes and other fluctuating expenses take a little more work. To get an accurate estimate, keep your receipts to track everything you spend for a month. You may find out you’re spending a lot more than you think.
To create your budget, follow these steps:
- Add up all of your income: This includes your regular salary, commission, child support and other regular income you use to cover bills and other expenses.
- Write down every recurring expense you have for the month: Start with the fixed bills, such as your rent or mortgage payment, car payment, insurance premiums and other bills. For utility bills and similar monthly expenses that fluctuate, look back at several months’ worth of statements to get an average.
- Calculate your spending: Include food, entertainment, gas, car maintenance, home maintenance, clothes, gifts and any other expenses you have. Be honest with these calculations to get the most accurate budget.
- Total your spending: Subtract that number from your total income. If the number is positive, you have extra money at the end of the month. If your number is negative, you are spending more than you make. This means you either need to increase your income or decrease spending. Cutting expenses is usually easier, unless you’re willing to get a second job.
- Evaluate your spending: Where are you spending too much? Which categories can you scale back to have extra money overall in the budget? Look for expenses you can cut completely, such as cable TV.
- Allocate funds to each category: Once you know how much you currently spend and identify areas that need attention, you can allocate your monthly income to different categories. Your fixed expenses already need a set amount in the budget. If your rent costs $1,200, allocate that amount to the category, for example. For the flexible categories, set a spending limit that lets you get what you need without spending too much. That amount varies depending on your available income and your family’s needs. A single person will have a much lower grocery category than a family of six.
- Monitor your spending: Simply creating a budget doesn’t do much good if you don’t follow it. Keep track of your spending, especially on those flexible categories such as food and entertainment. Check in throughout the month so you can cut back before it’s too late.
- Create a new budget each month: Much of your spending stays the same from month to month, but extra expenses pop up at certain times of the year. A yearly property tax bill, Christmas presents, car registration payment and back-to-school supplies are examples of expenses that can throw off your budget on certain months. Use your basic budget each month, making adjustments as needed for the current month.
Your budget becomes an informational and planning tool for your finances. Evaluate your budget regularly to see how you are spending your money. Follow these additional budgeting tips help utilize your personal budget:
- Set budgeting goals: If paying off debt is your primary goal, focus on that task as you build your budget. Keeping the goal in mind may inspire you to cut back on your spending so you can dedicate more money to your debt.
- Build savings into your budget: Treat your savings account just as you would any other expense.
- Create an emergency fund: Focus on saving at least $1,000 as an emergency account for unexpected expenses. This helps you avoid charging expenses on a credit card or falling behind on payments. Only use the account for true emergencies.
- Budget more than the minimum payment on credit cards and other debts: If your budget has wiggle room, allocate any extra money in the budget toward credit cards so you pay more than the minimum amount due. That extra money cuts down on the balance of the debt, letting you pay it off faster and cutting down on the amount of interest you pay.
- Determine your order for paying off debts: Some people focus on the highest interest debt first to cut down on the amount paid. Some tackle the debt with the highest balances first, while others pay off smaller debts and roll those payments into the next balance to pay it off at a faster rate. Having goals to pay off debts in a certain amount of time and having a specific order helps you stay focused.
- Adjust your budget categories as needed: You may find you consistently spend more in a particular category each month. Determine if you need to tighten up your spending or allocate more money to that category in your budget.
- Ask for lower rates to cut spending in the budget: Call your credit card companies first to ask if they can lower your interest rate. Even a small reduction saves you money overall. You may get a discount on your internet service, cable TV and similar expenses if you call and ask.
2. Put Bonuses, Monetary Gifts and Unexpected Money Toward Debt
Who doesn’t love surprise money? Work bonuses, monetary gifts, unexpected refunds — it’s tempting to go out and spend that money on fun things. Instead of treating it as a shopping spree, think about the impact that money can have on your debt. A few hundred dollars may not seem like much, but it quickly adds up to knock down your balances. Once you get your debt paid off, you’ll have more flexibility to spend your income and those extra money surprises.
Extra money that comes into your bank account is perfect for paying off debt because it not figured into your budget. That means you should already have enough money to cover your basic expenses, so you won’t miss the extra money if it goes straight toward paying off your debt.
If you get a raise at work, continue living based on your previous salary. Put the difference between your old salary and new salary toward your debt. You’re already used to living at the lower salary, so continuing that way frees up the extra money.
When you’re maxed out on raises or your company is slow to increase your salary, consider a temporary part-time job for a little extra “found” money. Treat every paycheck for your side job as a bonus that goes straight to your debt. No one wants to work more, but remind yourself this is temporary and will get you to your debt-free goal faster.
Possible sources of unexpected or extra money include:
- Work holiday bonuses
- Performance-based bonuses
- Employee referral bonuses
- Money you receive for birthdays or holidays
- Income tax refunds
- Class action settlement payments
- Rebates for purchases
- Cash back from special purchases
Another way to give yourself a little extra money to put toward your debt is to sell items you no longer need. Perhaps you received a birthday gift that didn’t fit or you never use. Extra furniture, clothes that no longer fit, appliances you never use and decorative items are just a few examples of other items you can sell. Selling online through Craigslist or local buying and selling groups is an easy way to get cash for those items.
3. Make All Payments on Time
No one plans to fall behind on payments, but life sometimes gets in the way. You spent a little too much going out with friends, or your vehicle broke down so you had to pay for repairs. Perhaps you simply forgot to make the payment on time.
No matter what the reason, late or missed payments cost you money. The immediate effect is the late fee assessed on the payment. That fee could be 10 to 15 percent of the monthly bill. It might not sound like much, but that amount adds up quickly on a larger payment. Even small fees of $5 or $10 add up quickly if you are repeatedly late.
Once you fall behind, it becomes more difficult to catch up on your payments, especially when you have an extra late fee. Now you have to allocate more money from your budget toward that payment. If your budget is already tight, that can really throw off your spending for the month. This can result in additional late payments, either on that bill or on others, while you play catch-up. More late fees cost you more money, and the cycle continues. Your interest rate on revolving lines of credit may also increase when you make a late payment or miss payments completely.
Your late payments can have a lasting impact on your credit and your ability to repay debt. When you are late on a payment, expect that information to affect your credit. Missed payments reported to the credit bureaus lower you credit score, with effects that can last months or years. Paying your bills on time can have the opposite effect on your credit by improving your score, especially if your credit score is on the low side.
Staying current on your payments is an easy way to pay off your debt faster. Instead of going toward late fees, your money can go toward paying off your debt. You also keep your interest rates low, reducing the total amount you have to pay back.
If you struggle to make your payments on time, here are some tips to keep you on track:
- Focus on sticking to your established budget. Your budget helps you stay on track so you don’t miss payments and prevents you from spending money that should go to bills on other things.
- Explore the payment options for your bills. Many offer online, automatic withdrawal, phone and mailed payment options. Online and phone payments give you the chance to make last-minute payments if you forget. Ask about fees on various payment types. Some companies charge a small fee to make phone payments, for example.
- Create a bill paying area in your home to simplify the process. Keep all current statements in the area. If you mail some payments, keep stamps and your checkbook in the area.
- Organize the bills in your bill paying area based by due date. This ensures the bills due first stay in front as a reminder to pay them. If you receive bills electronically, set up email folders to keep the bills organized and easily accessible.
- Set aside time and money each month to pay your bills. Sit down on pay day and allocate those funds, for example.
- If you know you’re prone to forgetting to make payments, set your bills to come out of your checking account automatically each month.
- Pay your bills as soon as you get the statements in the mail. If you need to wait until the due date to keep your budget in check, schedule the payment online for the due date.
- Mark the payment due dates for all of your bills on a calendar. If you have to mail a payment, mark the mailing date on the calendar to ensure you send it enough time to arrive before the due date.
- Sign up for email reminders for bills when available.
- Use a personal budgeting app or financial software to keep your bills straight.
- Set your own alerts on your smartphone to remind you of upcoming due dates.
- Pay ahead a month or two on bills if possible to give yourself a buffer in case you forget a payment.
If you do miss a payment, call the company to see if they can waive the fee. If it’s your first time missing a payment, they may give you a break. Just don’t expect them to waive the fee every month.
Along with staying on top of bills, keeping your bank account balance positive is another way to avoid fees. When you pay your bills, ensure your bank account has sufficient funds to cover the amount with a buffer. With the typical overdraft fee ringing in at $34, you can lose a lot of money if you don’t watch your balance carefully. Those overdraft fees put your account further into the negative, making it difficult to catch up, with the potential for even more overdraft fees and lost money.
Set up a back-up plan for overdraft situations. Many banks allow you to connect your checking account to a savings account to automatically cover overdraft amounts. This may come with a small fee, so avoid relying on the overdraft protection on a regular basis.
4. Cook Your Own Meals
The convenience of the drive-through beckons on those busy days, but resisting the call saves you from spending, which leaves more money to go toward paying off your debt. Cooking meals at home is a way to free up money to chop down debt.
Eating at home can be a challenge. You need to keep the ingredients on hand, and you need to give yourself the time to prep and cook the food. Between work, appointments and socializing, finding that time is difficult for many families.
A few changes to your routine can help you eat at home more often. Here are some ideas to get you started:
- Plan your meals for the week and post a reminder so you are more likely to cook at home.
- Make a shopping list to avoid grabbing extras that increase spending.
- Have a few go-to cheap, quick meals, and keep the ingredients on hand for those busy days when things don’t go as planned.
- Do the prep ahead of time, including chopping vegetables, trimming meat and combining ingredients to get the process started.
- Double or triple your favorite recipes to freeze for another time or to take as leftovers for lunches.
- Pack brown bag lunches the night before to avoid the morning rush and decrease the chances of buying lunch out.
Now that you’re in the habit of cooking at home, focus on cutting food costs. Planning cheap meals and cutting back on expensive ingredients help cut the food expense section of your budget, allowing you to put more toward debt. Here are some ways to make home-cooked meals cheaper:
- Cut back on meat, the most expensive ingredient in most recipes, and replace the meat with more vegetables or grains.
- Slow cook your food to improve the taste and texture of cheaper meats and save time.
- Stock up on foods you use regularly during sales.
- Learn which stores have the best prices on staples in your pantry.
- Take advantage of price matching to get the best price without driving to multiple stores and wasting gas.
- Make your own sauces, dressings, seasoning mixes and other basics to save money over store-bought versions.
- Repurpose food items, such as making broth from leftover chicken bones.
- Grow vegetables from seed to save money and bulk up on healthier foods.
- Eat leftovers to avoid food waste.
- Get creative with the items in your pantry instead of buying new ingredients for every meal.
Certain meals are simply cheaper than others. Having a list of those inexpensive meals on hand helps you feed your family for less. Try these ideas:
- Vegetable soup
- Pasta dishes
- Breakfast for dinner
- Bean burritos
Have a Back-up Plan for Unexpected Expenses
Learning how to become debt free isn’t difficult, but the actual process of eliminating debt often comes with challenges. Even the most detailed budget sometimes fails due to unexpected expenses or a sudden decrease in your income. A quick cash loan can help you get through those financial bumps, so you can cover unexpected expenses or keep up with your bills when cash runs short.
Cash 2 U Loans offers lines of credit and title loans in various amounts to fit your financial needs. Find a convenient location, and begin the application online today to get cash fast from a company you can trust.