Americans are buried in debt from mortgages, credit cards, personal loans, bills, and student loans, and the amount owed in total is on the rise. In 2020, Experian reported that the average American owes approximately $$92,727 in total debt—the highest amount on record in the U.S. Who's carrying the most debt? Members of Generation X owe a staggering $140,643, followed by Baby Boomers ($97,290) and Millennials ($87,448). This debt includes mortgages, student loans, credit cards, and other types of personal debt.
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Check out these steps for paying off debt.
Stop borrowing money
The first and most important step in getting out of debt is to stop borrowing money. No more swiping credit cards, no more loans, no more new debt.
Reshaping your attitude toward money and debt is the most fundamental change that has to happen. In order to avoid digging yourself into a bigger hole of debt, you have to understand the true cost of swiping a credit card and taking out new loans.
Resolve to live on a cash basis while you make your changes. Don’t worry about debt consolidation or balance transfers at ko of this point – you’re still in the early stages. You don’t want to trade one kind of debt for another until you understand your situation and have a plan.
When we counsel people entering a debt management plan, we take their credit cards and cut them up. Resolve to live on a cash basis; it’s crucial to starting a new phase of life without taking on new debt.
Track your spending
The next step in getting rid of debt quickly is to figure out where your money is going. It can be difficult deciding where to make budget cuts without having a full picture of what you pay for and how you spend.
It’s best to track all of your monthly bills for at least a month as well as daily spending. Don’t forget to include your debt payment obligations while tracking.
There are a number of ways to track your money. Some of the most common ways include:
Use a budget worksheet
Keep notes in a notebook
Use a free money management app
Use banking app trackers
Keep receipts
Whatever method you choose, make sure it is one you will remember to use every day and will help you get a full picture of just how much money you spend.
Set up a Budget
Once you’ve tracked your spending, it’s time to create a budget. By using your regular spending as a guide, this budget should account for all of your needs.
The tracking will also show you places to cut spending. You’ll be able to see where you’re spending too much and where you can easily make cuts without deeply affecting your life. Of course, you may also find places that need changes that you may not want to make. It’s important to find a balance between livability and a strict budget to get out of debt.
A vital part of the budgeting process is to put it in writing. It’s not enough to mentally plan how much you’re going to spend – it has to be recorded in concrete form.
It’s also important to include financial goals in your budget. Writing your goals down makes you 42% more likely to achieve them. For you, the goal to get out of debt fast is probably your #1 priority, but don’t forget building an emergency savings fund as well.
After your debts are paid off, you can come up with more goals to save. Just remember to add them to your budget in writing to hold yourself accountable.
Create a plan to pay off debt : Try a debt snowball Method
Create a family budget
It’s common to see one member of the family be responsible for all of the household’s finances. This often means that no one else in the household knows what’s really going on. If you’re going to be successful, it’s important to have a strict budget to pay off debt that the whole family knows about.
Come clean with your partner and family members. If they don’t know your full debt situation, then you’re going it alone. Tell them about the debts, your plan to pay them off fast and get them on board with your repayment strategy.
You need everyone in the house to participate in the tracking and budgeting steps. All the saving in the world does you no good if you live with someone who is spending without regard to the household budget. You have to involve them in this process and get them on the same page.
This might include some hard conversations. Your kids might have to accept a less-than-stellar Christmas or you may have to put off that big purchase they were hoping for.
If handled correctly, these types of conversations can be beneficial for kids. Budgeting and savings are excellent personal finance skills that may not be learned elsewhere. Keep them involved in the budgeting process and let them pick out specific goals to aim for. Focusing on this goal may make them less likely to splurge elsewhere and more helpful to you when it comes to keeping the family on a budget.