You’ve graduated from budgeting 101. You have effectively set up a budget that functions properly and that you evaluate on a regular basis. You now track all expenses and incomes. You save receipts and record expenditures. You plan for upcoming events and annual events. You check this budget on a weekly basis. You are now ready for the next part of preparing for a financial investment opportunity.
The next step is to get out of debt. As mentioned in previous articles, before investing any monies, you need to be sure that you are not losing monies to high interest debts. By this, I mean that it back tracks to save money at a lower interest rate than how fast / how high your debt is accruing interest.
Before paying off your debt, set up an emergency fund. This will help you to avoid going into debt if emergencies arise. Always keep a default amount in this account and only use it in times of emergency.
Evaluate your debt to income ratio. What outstanding debts do you have? Which creditors do you owe money to? Which debts have the highest interest rates? The best thing to do here is to write down all of the debts owed, to whom, the amount, the interest rate, and the time limit. This allows you to see exactly what you owe in comparison to others. From here, you have several options.
Some individuals prefer to pay off the highest owing debt first. This can be good and bad. While you tackle the big one and get that paid off, you may be paying off the debt with the lowest interest rate first. This is not a good idea. For example, student loans are set up on a lower interest rate than regular loans. While they carry a really high balance, they can vary between 2 ½ percent to 5 or 6 percent. In comparison, credit cards typically carry interest rates over 10 percent, sometimes almost 30 percent. Individuals would be wiser to consider the interest rates before the principle amounts on the debts owing.
I suggest looking at two different ways to eliminate your debt. The first option deals with the interest rates. Line up your debts, from highest to lowest, based on interest rates. Then, tackle your debts, starting with the highest.
If you struggle with how long this may possibly take, consider option number two. This is known as the “snow ball” method. This method works with the psychology of paying off debt. Many financial gurus argue that unless consumers see some immediate progress, they’re probably not going to continue paying off debts. As a result, they suggest paying off the debts from the smallest principle amount owing to the largest. You apply the majority of the payment to the small debt, and make minimum payments on the other debts. They say, “Forget the interest rates.” Once you have paid off the smallest debt, the next month, you take the amount you would normally pay to that smallest amount and you apply it to the next smallest amount. As you gain victories, you’ll be motivated to continue climbing out of debt.
What will work best for you? That depends on your personality. That depends on your thinking. You know yourself. Decide on a method and get going.
After you have paid off credit cards, move on to car loans, than your mortgage. Rid yourself of all debts.
Once you have reached financial freedom from debts, cut up all credit cards. Stick to cash. Make a pact to purchase items that you have the cash for up front. Do not go into debt for entertainment, for household items, or anything of that nature. If you need education, work at the same time to avoid excessive amounts of loans. If medical emergencies come up, make payment arrangements.
Prepare yourself for emergencies. Do everything you can to keep yourself financially free from the chains of debt. You will have peace. You will be happy, and you will be prepared for rainy days and for the future. Upon debt elimination, you are ready to set up an extensive savings plan. From there, you can begin looking at financial investment opportunities.