The Ultimate Debt Freedom Resource Guide

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The differences between credit counseling, debt management and debt consolidation

 

For people struggling with credit card debt, there are several debt repayment options offered by different organizations.

Credit Counseling

Credit counseling organizations, usually non-profit, advise you on managing your money and debts, help you develop a budget, and usually offer free educational materials and workshops. Typically, their counselors are certified and trained in the areas of consumer credit, money and debt management, and budgeting. Counselors discuss your entire financial situation with you, and help you develop a personalized plan to solve your money problems. If you are having trouble making payments on your debts a credit counselor may be able to help you with advice or by organizing a “debt management plan” for all your debts.

Debt Management

Debt management is the process in which you manage the repayments of debt. You can create your own debt management plan or have a credit counseling organization assist you with a plan. The words “debt management” tends to be associated with organizations that will manage the repayment of your debts however any form of debt repayment planning can be consider debt management.

Debt Consolidation

A process of combining debts into one loan or repayment plan. Debt consolidation can be done on your own, with a financial institution or through a counseling service. Student loans are often consolidated in order to secure a lower interest rate. Combining the balances of multiple loans into one single loan. Consolidating is often used as a strategy for reducing monthly payments by extending repayment terms and/or acquiring a lower interest rate for some or all of the loan balances.

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Options to Manage Debt

The first step is to organize your debt which means creating a list of all outstanding debt obligations including lender name, interest rate, loan type (credit, loan, installments). Then, negotiate the interest rates on credit cards to lower the total cost of that credit type. Finally, budget enough funds to make the minimum payments for each debt and allocating additional funds to higher interest rate loans.

There are five ways to manage your debt repayment:

  • Debt Payoff – Use a debt repayment strategy such as the Debt Avalanche or Debt Snowball Methods to payoff credit card debt.
  • Debt Consolidation – A process of combining debts into one loan or repayment plan. You can consolidate your multiple student loans into one refinanced student loan reducing the number of payments to one single payment and potentially lowering your monthly payment and decreasing your interest rate. Additionally, consolidating your credit card debt into a debt consolidation loan for lower interest rates and fixed repayment term.
  • Debt Management – Debt management is the process in which you manage the repayments of debt usually through a program called a DMP (Debt Management Plan). If you find you are struggling to make payments, it’s time to work with a DMP provider that can work out a program with your creditors to lower interest and set a repayment schedule.
  • Debt Settlement – A process where you pay an agency to negotiate directly with your creditors in the hopes of making significantly reduced settlements for your debts.
  • Bankruptcy – A legal proceeding which allows a debtor to discharge certain debts or obligations or allows the debtor time to reorganize his/her financial affairs so he/she can fully pay the debt.

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How to get out of debt

Simply put prioritizing debt repayment over purchases or savings can help you get closer to debt zero. However, there is really no one size fits all answer to this question. It really depends on the types of debts you have, if you’re paid up or past due, your resources and more.

  1. Prioritize debt repayment. Make a conscious effort to cut expenses and focus your attention to paying off debt. Every decision made around money should be filtered around debt repayment. This means paying all of your minimum payments. Any extra funds should go to the highest interest rate debt until it’s completely paid off.
  2. Limit your spending. Spending money is a part of life but it can get out of hand. To get out of debt, you’ll need to cut expenses. Reduce the monthly payments on housing, utilities, transportation, subscription services, interest paid on credit card debt. Use the savings to pay towards debt.
  3. Make a commitment to stop borrowing money. The first step in digging out of debt is to stop adding to the debt load. This may require changes to your lifestyle especially if it is funded through credit. Put the credit card away and start saving money.
  4. Organize your debt. If you don’t know how much you owe or whom you owe, it’s difficult to create a plan to pay off debt. Organize and analyze your debt from credit cards, personal loans, home and car loans. Make a spreadsheet that includes information about all of your debts. The information should include balance, interest rate, due date, payment amount, etc.
  5. Make extra cash and pay towards debt. Supplement your income by selling items you don’t need, get a part-time job or perform side hustles. Use the extra income to make additional payments towards debt which reduces the amount of interest paid.
  6. Consolidate unsecured debt. It may be difficult to make payments to multiple creditors and consolidation could help you save thousands of dollars on financing charges and make repayment easier.

The only way to get out of debt is to pay as much as you can on existing debt and ensuring no additional debt is added.

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How to Pay Off Student Loan Debt

It’s important to reach out to your student loan lenders and get detailed information on your loans after graduation. This can give you peace of mind when figuring out your rights and options. Consider refinancing and making extra payments to pay the student loans quicker.

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Should you pay off high interest rate or low balance credit card first?

There are two schools of thoughts when it comes to paying off credit card debt. Paying off credit is a behavioral issue and not so much a logical one. It’s important to understand what motivates you to pay off debt and choose the best approach. It’s the feeling of personal satisfaction that will help you continue your way to paying off your credit card debt.

The two approaches are:

  1. pay off the high-interest rate credit card
  2. pay off the low balance credit card

Ask yourself, which one would motivate you? If paying off a small credit card balance will excite you to pay off the next one then go for it. If you want to pay off the higher interest rate credit cards because paying a ridiculous APR bothers you then go for it.

These two approaches are also called the Debt Snowball and Debt Avalanche.

Debt Snowball method is paying off the smallest balance first while paying the minimum on other cards. Once you’ve paid off the smallest balance (put in as much as you can) you then apply those payments to the second smallest up until you’re at the largest balance. So you’re building the snowball.

Debt Avalanche method is paying off the credit card balance with the highest interest rate and not the largest balance. This approach targets your desire to pay less interest. This approach makes the most mathematical sense and may be suggested by many financial experts.

Which one is right for you depends on what motivates you to get out of debt. If you choose one way, it doesn’t stop you from switching to another way. The ultimate goal is to pay off debt so don’t be afraid to try either to see which one can keep you motivated.

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Is consolidating credit card debt with a consolidation loan a good idea?

Debt consolidation can be the answer to many people’s financial situations. However, it shouldn’t be considered as the only solution to break financial habits.

There are benefits to personal loans that consolidate your unsecured credit card debt into one loan with one payment. Often times the interest rate is much lower and fixed for a set repayment time period. Minimum monthly payments to a credit card might take you decades to pay off but a debt consolidation loan can be paid off in as little as 24 months.

It all depends on the type, interest rate and terms of the debt consolidation loan.

However, debt consolidation loans can add to financial distress when financial habits and spending remains out of control. If you haven’t acknowledged or worked to change your mindset around debt, you might find yourself not only with a debt consolidation loan payment but additional new credit card debt.

Situations when consolidating debt may be a good idea:

  • If you have debt from multiple lenders at very high-interest rates.
  • If you are unable to keep up with the number of payments to different lenders.
  • If consolidating multiple loans and credit card balances will lower monthly payments and the total cost of borrowing.

Generally consolidating debt is a good idea but it is important to look at the terms and conditions of the consolidation loan. Look at fees, repayment terms, as well as the reputation of the lender. Learn more ways to achieve debt freedom.

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The Debt Avalanche Method Explained

Debt Avalanche Method

The debt avalanche is a method of credit card debt repayment which focuses attention on repayment of debt with the highest interest first. Once you’ve paid the highest interest you move onto the second highest interest and continue to move down the list until all debt have been paid. You also apply all prior payments from paid off debt to the next debt essentially creating an avalanche.

This method makes the most mathematical sense since you are focused on eliminating debt with the highest interest rate thus lowering the cost of the debt. However, math aside, motivations are quite different.

How to Use the Debt Avalanche Method

  1. List all your debts with the highest interest rates in descending order.
  2. Focus on repayment of the debt with the highest interest rate first while making minimum payments on the other debts.
  3. Apply the payments from the first debt (now paid off) to the next debt (row 2) and so on.

Example:

Credit Card 1 – $5,000 – 20.99% – $89

Credit Card 2 – $6,300 – 14.99% – $121

Credit Card 3 – $500 – 9.99% – $20

In this example, you would pay as much as you can on credit card #1. Once paid off, you would use the $89 and add to the minimum payment of credit card #2. This would become a payment of $210. You can choose to add more to the payment as well. While paying off credit card #2 you’d continue to pay the minimum on credit card #3. Once done paying off credit card #2, you would then use the payments from #1 ($89) #2 ($121) and #3 ($20) to make the monthly payment on credit card #3. After strict adherence you’ll find you’ve avalanched your way out of debt.

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The Debt Snowball Method Explained

Debt Snowball Method

The debt snowball method is a way to repay by tackling smaller debt balances first. After a smaller debt is paid off the payments are then applied to the next smallest debt balance and so forth. Think of your payment to one card increasing (like a snowball growing larger as more snow is compacted) each time you’ve paid off a balance.

The idea is that your momentum will increase as you see one credit card or loan paid off after another regardless of interest rates. The feeling of accomplishment after paying off one debt will lead you to pay off another.

This method might not make the most mathematical sense since potentially higher interest rate cards with higher balances continue to accrue interest. But, this method focuses on a motivation to get rid of one credit card balance sooner rather than later.

How to Use the Debt Snowball Method

  1. List all your debts with the smallest balance first.
  2. Focus on complete repayment of the debt with the smallest balance first while making minimum payments on the other debts.
  3. Apply the payments from the first debt (now paid off) to the next debt (row 2) and so on.

Example:

Credit Card 1 – $500 – $25

Credit Card 2 – $6,300 – $146

Credit Card 3 – $7,000 – $200

In this example, you would pay as much as you can on credit card #1. Once paid off, you would use the $25 and add to the minimum payment of credit card #2. This would become a payment of $171. You can choose to add more to the payment as well. While paying off credit card #2 you’d continue to pay the minimum on credit card #3. Once done paying off credit card #2, you would then use the payments from #1 ($25) #2 ($146) and #3 ($200) to make the monthly payment on credit card #3. After strict adherence you’ll find you’ve snowballed your way out of debt.

 

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The Secret to Paying Off Credit Card Debt

Staying motivated is an important part of paying off credit card debt. In the beginning, paying off debt can be exciting but as time progresses one can become discouraged in the snail crawl of debt repayment.

Here are a few tips to keep in mind to help pay off credit card debt:

  1. Have a plan. Create a credit card debt payment plan and know your motivations. It’s important to understand the bigger picture to keep you focused on repaying a debt as a priority overspending. When you understand what you hope to accomplish after credit card payoff, you may notice a shift in your savings, spending and debt repayment habits.
  2. Pay more than the minimum. When possible always pay more than the minimum payment amount. Check your credit card statements on the best-recommended amount to pay off the balances in 3 years rather than 20 years. Adding a few extra dollars each payment can go a long way in helping you reduce the interest paid and the time it will take to payoff the credit cards.
  3. Balance transfers. You might have credit card debt with high interest and can easily transfer those balances to a 0% interest rate card. This option is great especially when you’ve stopped relying on credit cards for purchases. Credit card balance transfers is a good way to lower your interest rate on existing balances but you aren’t actually paying off debt but shuffling it around. Use credit card balance transfers as a tool to achieve debt pay off not a solution.
  4. Consolidate debt. It is easier to pay off one debt than to pay off multiple credit cards. If you’re able to get approved, consolidate your cards to make one easy payment. Again, stop using the credit cards and focus your efforts into paying off the consolidation loan. Debt consolidation loans may lower your monthly payment compared with the aggregate monthly payments of multiple credit cards. You’ll also benefit from making one payment as opposed to many. Even if you do find savings from consolidation use that monthly savings towards repayment of the principal loan amount each month. There are many debt consolidation loans offered by banks, credit unions, and financing companies. However, make sure you understand the terms and the total cost of borrowing before signing the agreement.
  5. Use the debt snowball or debt avalanche method. You can choose structure your credit card debt payments in a way that motivates you. With the debt snowball, you pay the lowest balance first regardless of the interest rate. When you’ve paid the balance in full, you roll that payment into another credit card’s minimum balance payment and so on. The debt avalanche makes you focus on paying the highest interest rate credit cards first.

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How to Cut Household Expenses

There will be points in your life where you feel like even getting by is a struggle – let alone actually saving some money in a bank or portfolio. More often than not, just your basic living expenses might be what’s eating into your bank account.

If you’re feeling the sting at the bank, take a look at these easy ways to cut household expenses.

  • Start couponing, and take it online. You would be shocked at how much money you can save on groceries, clothing, and even home repairs by looking through local Penny Saver magazines, coupon booklets, and online sites that specialize in redeemable discount codes. If you are very good at using coupons, you will easily save a hundred bucks or more per month.
  • Go green. Conserving energy and water will obviously result in lower energy, heating, and water bills. So, start investing in energy-saving appliances, turn off the lights when you’re not in the room, and do your best to conserve water whenever possible.
  • Buy concentrated cleaning supplies. Concentrated cleaning supplies have a more powerful punch than those that are diluted. So, it saves you money by making you use less product every time that you clean. Need we say anymore?
  • Consider switching your homeowners’ insurance, or your energy company. Energy deregulation allows you to choose your energy provider at times, and that means that you may be able to save a lot of money by switching to solar, or by switching to another form of energy. Similarly, there’s going to be a lot of difference between one insurance policy versus another. Find out if there’s a similar yet cheaper option out there for you.
  • Bundle your insurance. Insurance companies that have families that rely on them for more than one form of insurance often get major discounts. Ask your provider if that is the case with the company you chose.
  • Carpooling saves gas. Enough said.
  • Trim the fat on your entertainment subscriptions. Ask yourself if you really need your cable, if you really need your newspaper subscription, or if you need that fancy gym membership. Most of those expenses can seriously eat into your budget month after month – and it’s quite possible that you might not even use them that much. If you’re not using them as much as you should, then stop your subscription.
  • Learn to cook your meals at lunch. Microwave dinners are surprisingly expensive, and those expenses add up. You can get the most out of your nutrition and also get a ton of savings by cooking your own food.
  • Buy in bulk. Do you have a couple of items that you consume in bulk, such as pasta or tomato sauce? If so, then you might get the most savings out of buying in bulk.
  • Switch cellphone plans. It’s often best to go for a cellphone plan that is cheaper, but doesn’t have as much data. More often than you’d think, people choose the wrong plan for their personal needs just because they don’t really know how much phone data or talk time they really need.

Whenever you can, look for ways to save. As long as you keep an eye out for great savings, you’ll be able to get a lot out of your budget – regardless of what that budget is.

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Lower Your Monthly Expenses

Having lower monthly expenses means you’ll need to make less money in order to cover your lifestyle. Start thinking about how you’re spending your income on monthly household expenses.

Give these ideas a try and see how much you can save monthly. The ideas below will require you to get on the phone and speak with your service providers. You may be a phone call away from saving a few dollars per month.

6 Ways To Lower Monthly Expenses

Lower your cellphone bill: Call your cellular provider and asked about new promotions and discounts to lower the cost of your monthly cellphone bill. Can you switch to a different plan? Can you get added to an employer or association discount? Out of contract? Consider switching carriers.

Lower your cable/internet/home phone bill: Call your existing provider and ask about lowering your monthly bill. Negotiate with the representative and consider cutting cable if necessary or removing your home phone line. Additionally, you may be able to get a better price by switching providers.

Lower your utility bills: Find out if you qualify for credits with your water, electricity, garbage, or oil/gas providers. Request information on how you can lower your monthly bills. An investment in energy-efficient lights and appliances may reduce electricity bills. Changing thermostat settings may reduce oil and gas consumption. Fixing a dripping faucet may also reduce water bills.

Lower your subscription costs: Cut out subscriptions to services you do not use. You may have subscribed to Netflix or a newspaper or credit monitoring service that you rarely use. Consider canceling them or reducing the cost with a lower-priced subscription.

Lower your banking expenses: Are you paying for your banking services? Check your statements online and search for the fees you’ve paid. Call up your financial institution and find out how you can get those fees back and how you can avoid them in the future. Not happy with your banking provider? You have options to switch for better service, terms, and lower fees.

Lower your credit expenses: If you carry a balance on your credit card from month-to-month, you’re paying interest charges. Before considering opening up a new card and doing a balance transfer, call your credit card issuers and ask if they could lower your interest rates. Paid fees in the past 3 months? Ask if they can be reversed.

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Increase Your Income and Lower Your Expenses

There are two things you’ll need to do in order to pay off debt sooner. First, you must cut your expenses. Your focus must be on reducing the amount of money spent. If you’re continuously spending your income, then you won’t have the extra money to pay off debt.

The biggest impact on your financial status is a reduction of expenses. Reducing your expenses means reducing your cash obligations. Not only are you freeing up cash to use to pay down debt, you’re also decreasing the cost of your lifestyle in the long term. Eliminate or negotiate your subscriptions, plans with service providers. Find alternatives to housing and transportation too.

Secondly, once you’ve cut as much of your monthly expenses, you must increase the amount of money you make. You can do this by getting a raise at work or having a side hustle.

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How to Start a Budget

There are a number of ways to start a budget from the traditional to the technological. Whichever approach you take, make sure you’re committed to the success of creating, maintaining, tracking, and sticking with your budget.

Budgets are as much about mindset as they are about financial numbers. Budgeting will help you live within your means and push you towards financial success.

Steps  in Starting a Budget

  1. Clarify your vision and set financial goals. You’ll need to have a clear picture of the type of life you want to live. Then, set financial goals related to that vision.
  2. Gather one month’s income sources. Get a better understanding of how much money comes in each month. Income sources come from paychecks, dividends, alimony, interest payments, etc.
  3. Gather one month’s expenses. List all your monthly expenses and debt obligations. Your expenses include rent, auto loan payments, utility bills, services like cellphone charges, subscriptions such as Netflix, monthly gas expenses, and ATM receipts, and any receipts for one month (dining, movies, random purchases, birthday gifts, etc).
  4. Create categories. Place your income into one pile. Categorize your expenses into housing, transportation, utilities, entertainment, food, discretionary, etc.
  5. Calculate the totals of each pile. Take a piece of paper or excel sheet and type in the information. Deduct expenses from income.

Are you spending more than you’re making? Then it is time to adjust and make changes.

The information you gather from the traditional approach is an accurate depiction of your actual spending lifestyle.

This is a simple way of understanding what’s coming in and going out. Based on the information you discover, you may uncover some additional financial goals such as debt repayment or purchase of a luxury good.

 

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Go Through A Budgeting Process

A budget will help you understand your income, expenses, and debt. You need to know how much money is going in and where your money is going. This is the first and necessary steps in order to create a financial plan to achieve debt freedom.

Here’s what you’ll need to do:

  1. Calculate your income
  2. List and calculate your monthly expenses (housing, utilities, subscription services, food, etc)
  3. Calculate your debt and monthly debt payments (separate base on mortgage, credit cards, secured loans like a car note, student loans, and any other types of credit)

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Changing Your Mindset

  1. Make a commitment to stop borrowing money. The first step in digging out of debt is to stop adding to the debt. This may require changes to your lifestyle especially if it is funded through credit. Put the credit card away and start saving money.
  2. Organize your debt. If you don’t know how much you owe or whom you owe, it’s difficult to create a plan to pay off debt. Organize and analyze your debt from credit cards, personal loans, home, and car loans.
  3. Prioritize debt repayment. Make a conscious effort to cut expenses and focus your attention on paying off debt. Every decision made around money should be filtered around debt repayment.
  4. Make extra cash and pay towards debt. Supplement your income by selling items you don’t need, get a part-time job or perform side hustles. Use the extra income to make additional payments towards debt which reduces the amount of interest paid.

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Change Your Mindset and Achieve Debt Freedom

Debt is the ball and chain that holds us back from living the life we want to live.  At first, using credit seems harmless until our spending gets out of control resulting in long-term debt.

The first step in debt elimination is an acknowledgment of your entire debt picture and an awareness of your spending habits. It may be hard to accept past mistakes, but completely necessary in order to remove the shackles of debt. In order to move from debt holder to debt freedom, you must accept your past financial mistakes and accept your role in getting out of debt.

The reason why you can’t get out of debt:

John manages to pay off $30,000 in debt in 2 years on a $45,000 annual salary. While Jane makes $80,000 a year but can’t make a dent in her $30,000 debt. John is on his way to financial independence and Jane remains stuck. Why?

There are many factors that impact one’s ability to achieve debt freedom. For many, the biggest culprit is overspending. In the example above, Jane makes a great living but living way beyond her means. This leaves no money available to pay extra towards debt.

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