Living in a consumer nation has made it normal for individuals to have multiple credit cards and live with mountains of debt. While debt can be a useful tool if used correctly, that is only true for a small percentage of Americans. Debt can cut into your investment returns and constrict your cash flow, causing you to live paycheck to paycheck. However, if you find yourself hindered by debt there are several ways to begin cleaning up your financial health and begin building wealth.
The first item is to have some sort of emergency fund in place, as this will ensure you stay away from debt in the event of an emergency. Many times, people use credit cards as their emergency fund, and this can mean one step forward and two steps back. Ideally, you’ll want a couple of thousand dollars in your savings to cover minor things such as a fridge going out or a flat tire. So instead of using a credit card to cover the emergency, you can pay cash and not go further into debt or erase progress that’s been made.
Create a Budget
Next, in order to eliminate debt effectively, you’ll need to have a proper budget in place. With a proper budget, you can track your spending and ensure you are allocating your money properly. This will give you a chance to plan for your upcoming expenses and utilize excess cash to be paying off debt. Also, during months where there are more expenses, your budget will allow you to plan for those evens without utilizing a credit card.
Creating a budget is simple and can be done with an Excel spreadsheet or the help of an app. Find what fits your current lifestyle and go from there.
Eliminating Your Debt
Once you have the first two topics in place, you are essentially ready to begin eliminating your debt. There are several schools of thought when it comes to eliminating debt and we’ll go over two of the more popular in this article.
The first is titled the debt avalanche and can save you money on interest payments. When implementing the debt avalanche, you’ll first want to arrange your debts highest to lowest by interest rate. Once you’ve done that, you’ll begin paying as much as possible to the first debt, eliminating the balance as quickly as possible. After you’ve completed paying off debt one, you’ll take all of that money and roll it into the next debt, attempting to pay that off as quickly as possible.
Secondly, you can implement the debt elimination process that is called the debt snowball. This is similar in nature, except you will list your debts in order from smallest to largest by balance, and begin paying as much as possible on the smallest. While this may not save you as much in interest payments, you may see results quicker because you are paying off your smallest debt quickly.
Increasing Cash Flow
The last item to consider is when eliminating debt, you’ll want to increase your cash flow as much as possible. While you may have a healthy free cash flow, you’ll want to pay down your debt as quickly as possible.
Some ways to increase your cash flows include having a garage sale. By selling all of your unwanted or unused assets, you can raise cash to put towards your debt. Another way to raise extra cash is to begin flipping items, which is buying something cheap and selling it for more. This can be done by going to garage sales or thrift stores, where you may find underpriced items. Lastly, you can pick up a second job delivering pizzas or working side jobs. While this may not be enjoyable, it is only until you eliminate your debt and become one step closer to financial freedom.
Eliminating debt not only brings with it less stress, but you can begin building wealth that much quicker. Remember, any interest you pay on debt is cutting into returns on your investments because more often than not, the interest rate on your debt is greater than your return on investment. Debt elimination is more than possible, but it does take time and dedication to achieve.