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How to Reclaim Financial Freedom- A Step by Step Guide to Getting Out of Debt

Updated on October 4, 2016

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The First Step to Getting Out of Debt

While there are many paths to becoming debt free, the first step is the same for everyone facing financial hardship - stop allowing your debt to increase!

It may seem obvious, but many people try to get out of debt by paying off credit cards with other credit cards, asking for loans they don't need and cannot pay off, or by opening new credit cards that just compound the problem.

Creating more debt is never the answer if you are trying to become debt free. If you are stuck in debt, whatever the amount, the first step to ending your financial struggle is to stop increasing the amount you owe.

Below you will find a plethora of tips and tricks to help reduce, eliminate and keep you away from debt.

Start an Expense Journal

You may think that you are on top of your spending, but many people find that they overlook small expenses until they put them all down on paper.

Keeping a journal of all expenses, bills, incoming money, and outgoing money can help you visualize where you are spending too much money, and where you could potentially save more money.

Once you start writing down all of your expenditures, bills, and income, make sure you keep the journal in a place where you will see it regularly. If you tuck it away in a drawer, you are less likely to use it.

Having something tangible that allows you to see where your money is going is a simple way to determine where you can make cuts that will help you save money.

A Simple Graph to Use to Help Track Your Debt

One way I help save money is by using a digital coin bank like this one. You will be amazed how quickly that loose change adds up!

Set Up a Budget

When it comes to setting a budget, it can be helpful to breakdown your available budget by daily, weekly, monthly and yearly allowances. You can use your expense journal, start a new journal, or use a spreadsheet composed in Excel or Google Spreadsheets.

When creating a budget, use your expense journal to help make sure you don't forget any expenses that may be minor, or so regular that they have slipped your mind.

Write down every single thing you generally spend money on, how much money you spend (always over-estimate rather than under-estimate just to be safe), all the bills you need to pay-off, including dates the bills are due, and any other expense you can think of, large or small.

Allocate an amount of money per day, per week and per month to start off, and once you have managed to stick to those allocated budgets, you can add a yearly budget as well.

Big Life Events Can Come with Big Price Tags

Weddings, home ownership, schooling, pregnancy, death, and even vacations are just a few of the major life events that can cause increased debt.
Weddings, home ownership, schooling, pregnancy, death, and even vacations are just a few of the major life events that can cause increased debt. | Source

Prioritize All of Your Finances

When a person is living paycheck to paycheck, some bills become more necessary to pay then others. What is the benefit of cable if you don't have electricity?

Make a list of all of the bills you pay (or should be paying). Now, prioritize these bills in a sensible manner. When money is extremely tight, necessities are much more crucial than wants or desires.

When it comes to prioritizing essentials alone, things like water bills, power and mortgage payments, try to order the bills according to the current interest rates.

Place the bills with the highest interest rates at the top, followed by the bills with the smallest remaining balance and end the list with non-revolving debts.

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Consolidate Your Debts and Schedule Payment Plans

If you are one of the many people struggling with numerous bills that are past due, you may want to consider consolidating your debts or attempting to make arrangements with creditors to set up payment plans that are manageable for you to pay on time.

Consolidating Your Debts

Consolidating your debt is a good option if you know that you will be able to pay off the remainder of the debt in a reasonable time frame. Typically, when you consolidate your debts, you receive one loan that you are responsible to pay off.

Although this loan usually has a low interest rate to start off, any missed or late payments will make the interest rate skyrocket. The problem many people face when choosing to consolidate their debts is that they often feel like they are out of the woods, having only one bill to pay, and end up neglecting their debt consolidation plan, causing a bigger problem than when they started.

Payment Plan Arrangements with Creditors or Credit Counselors

Most reputable credit counseling companies will go over your debts, your budget and your income to help you decide whether or not a debt management plan is the best option for you.

Debt management plans typically help those in debt by alerting the credit card issuers of the situation, causing them to reduce interest rates so monthly payments are easier to manage.

The average person who undergoes a debt management plan experiences interest rate reductions averaging around 15%. That percentage could be the difference between keeping a person in the red and allowing a person to experience a debt free life.

Don't Let Money Rule Your Life

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Find Out Your Credit Score and Understand What it Means

What is a credit score?

Life is filled with numbers we must remember. We have PIN numbers, social security numbers, phone numbers, birthdays, cholesterol levels and more. One of the most important numbers we must know, yet the most commonly unknown number is our credit score.

Your credit score can affect so many things in life that it is financially irresponsible to not know your score. Although most scores fluctuate regularly, you don't have to check it often, once or twice a year max is perfect.

Your credit score is comprised of a number of factors, including the number of credit cards you possess, the number of outstanding payments you have, the amount of debt you are facing, the frequency of missed bill payments and more.

How do you understand your credit score?

Credit scores can range between 300 and 900, with higher numbers approaching 900 representing the best credit, and low numbers near 300 representing terrible credit.

Credit scores are also referred to as “FICO Scores”. This is because most credit bureau scores are produced from software developed by FICO (Fair Isaac and Company).

Many sites online can provide you with free access to your credit score. But it’s important to understand that not every credit score you can buy online is a true FICO Score, which is the score that matters most.

Budgeting Tips and Tricks: A List of Dos and Donts

Don't
Do
Start in a month with unusual expenditures (like a large amount of gifts in December).
Pick a more "normal" month that will set a good model for the rest of the year.
Fail to allow for unseen events.
Set aside an emergency fund to use when the unexpected happens.
Drive yourself crazy pinching every penny.
Allow for "blow" money or another category that accounts for impulse buys.
Ignore a problem when you see that you're spending too much in one category.
Find ways to save where you can.
Give up if you fail once or twice.
Stay on track. If you miss your budget one month, make a concsious effort to reach your goal the next month.
Track your expenses once a month.
Track all expenses as you go.
Make your savings or emergency money easily accessible.
Put money in an account or fund that will appreciate over time and won't constantly tempt you.

© 2014 Kathleen Odenthal Romano

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    • Kathleen Odenthal profile image
      Author

      Kathleen Odenthal Romano 3 years ago from Bayonne, New Jersey

      Debt is such an awful thing and a way to paralyze ourselves, I know from experience. I also know that debt is not the end of the world, unless we allow it to become the end.

    • Kathleen Odenthal profile image
      Author

      Kathleen Odenthal Romano 3 years ago from Bayonne, New Jersey

      I don't own a credit card etiher! Unfortunately I am paying off some bills, but the cards have been cut and my moneys under the mattress now! (runs to move hidden stash of money)

    • Eiddwen profile image

      Eiddwen 3 years ago from Wales

      This great hub will help so many Kathleen. There is nothing worse than the chains of debt hanging round our necks. Thank you for sharing and voted up.

      Eddy.

    • billybuc profile image

      Bill Holland 3 years ago from Olympia, WA

      Been there, done that, and I'm not going to write the book. LOL I paid off $100,000 in fifteen years...now I don't own a credit card and never will...it can be done.