1) First off, it is absolutely vital that you stop increasing your debt. Destroy any maxed out credit cards, and reduce yourself to a debit card. With a debit card you can only spend the amount that you put on the card and you will never get charged interest or be allowed to overdraw your debit card balance (in other words you cannot spend more than the amount you have put on the card). You should only ever use your debit card when you are trying to get out of debt.
2) Keep a record of your spending. People often find this incredibly annoying, but one of the keys to getting debt free is having a clear idea of where all your money is going. Every single day for an entire month, write down every single cent that you spend.
3) Next, you should attempt to categorise your monthly spending. Things like food, rent and medicine would be categorised as “must haves” and should therefore be purchased first. Things in the next most important category are things that are not quite necessary, but are still important. Items in this category might include, for example, new work clothes, gym memberships and dental appointments. If money gets particularly tight, you should be able to do without things in this category for a short time. “Like to haves” are the least important category, and it is here where you should aim to cut down the most of your spending. Things like alcohol, magazines, new video games and expensive dinners are completely unnecessary, especially if you wish to get in control of your debts. Your debt repayments should be placed into the “must haves” category, as the quicker you pay off your debt, the less interest you will repay.
4) Making a budget is always essential when paying off debt. Write down how much you spent in the month, and what you spent it on. Categorise the amounts spent in the categories listed above. This will give you an even better idea of where you can cut down.
5) After you have made your budget, you should have a clear picture of where your cash is going, and more importantly, how much you have left over. Make sure you do away with profligate spending on a morning coffee every day, or your weekly habit of buying a glossy magazine. Determine precisely how much you have left over at the end of every month and aim towards it. You should strive to pay this entire amount into your debt repayments. Remember, the quicker you repay your debt, the less interest you repay in total.
6) Make sure you get a clear picture of how much you owe, who you owe it to, and the terms of your repayments. Collect all your bills and type up a register containing all the important facts. This will give you a good idea of where you stand.
7) It is now time to start paying off your debt. The figure you came up with at the end of step 4 should be used to immediately pay off debt. It is a very good idea to prioritise your debts. If you have an overdue debt with a very high interest rate, it is a very sound idea to pay these debts off at a higher rate than others. This approach should save you some interest.
8) Once you’ve paid off some of your high interest debts, the debt repayment process becomes much easier. We always recommend that you review your register of debts (from step 6) and review the amount left over from your budget to repay debt (from step 5). This way you will always keep in control of your debts and get out of debt quicker.
9) Finally, stick to your plan – it will work but you need to be patient as it won’t happen overnight.
If you need some professional help with a plan to get out of debt, please call our professional debt advisors on our toll free line 1800 98 10 70.