How To Get Out Of Debt

New day, same money problems. Something is not right.

Here’s what probably happened. You had the urgent need for something you didn’t have yet. So you borrow money, confident that you’ll be able to pay back.

Perhaps you’re taking loans for college, investment, or a business opportunity. Since these goals help you to make more money, it makes sense to get them now.

Then, somewhere in between, unexpected expenses started to appear. Imagine budgeting and planning everything correctly, pre-spending every penny, only to end up with not enough money. Sounds familiar?

You’re not alone. Almost all of us have reasons to want more money than what we’ve made. Many make mistakes, and most of them pay back their debt regardless of the amount.

Given how common this problem is, you can be sure there are countless solutions out there. If others made it, so can you.

As long as, of course, you want to do so. If you don’t, guess what happens: interests grow, and you pay more than what you would if you paid 100% upfront.

Hopefully, this message raises your awareness of the problem. Once you identify what causes this debt, you can find solutions fast, and we’ll teach you how to regain control of your finances.

Why am I in debt?

Think about it: when was the last time you asked this? Most people never made this question. They perceive this problem as something that happens to them, not because of them. If you want to be the solution, you need to identify yourself as the problem.

“What am I doing wrong?”

Before you start regretting your past decisions, let us say it’s unnecessary. It may seem so obvious now that you’re suffering the consequences, but when you were at that moment, it wasn’t. If this was the first time you got into debt, then how do you expect to foresee a problem you haven’t experienced?

The first cause of debt will help you understand why we make such decisions:

#1 Confidence and optimism

It’s human nature, unfortunately, to expect the best for the future, especially about ourselves. That’s why we(our perception) are our problem.

Underrecorder expenses, overvalued earnings, underestimated factors. It doesn’t matter how financially smart you are. How can you get it right when you start with the wrong information?

Say you need a $10K loan for your career. You may receive the money almost instantly (if you qualify), but getting it back involves more uncertainty. Will you keep doing well at your job? What if you need to cover surprise expenses for your home, car, or family? 

Assuming you are perfect, you will still spend over $10,000. Should you make a budget to “optimize costs?” Yes, but saving habits will make you, at most, something close to $9,000. 

#2 Evading responsibility

You will need more money than you think you need.

That leaves an expectation problem. When those costs inevitably appear, how are you going to perceive them? Not very well. Since you didn’t plan it, it will feel out of control, and you will feel tempted to give up or ignore it.

Not accepting the problem will prevent you from thinking of solutions. Failure emerges as a possibility.

If you’ve been in debt before, simply use some self-awareness. Chances are you had to pay it later anyway, if not at a higher rate. How many times have you wished to go back to get things done early? 

If you aren’t deep into debt, do yourself a favor and avoid this situation.

#3 Failed projects

What if you’re right, and you shouldn’t be in debt?

  • You borrowed to study and get a degree, completed it, and have no job to pay it back.
  • You raised money for a business that failed.
  • You did some high-risk investing with borrowed capital and blew it all in one big trade.

Was it money or you? If you had more money, would have that helped you pay it back, or get deeper into debt? You certainly have to take risks for a bigger reward, but at least use your money. Allow yourself to win only as much as you can lose.

There’s nothing wrong with failing as long as you keep looking for solutions. We’ve all been there. Just don’t think that more money will save the problem, because it will only worsen it.

#4 Inconsistent income

You work for a company, but you don’t know how long it will be around. Or you have your own business but rely on a single income stream. Add to it an uncertain global economy.

If you work these many hours on this project this way, you make this amount of money. But if you do the same work another day (or just follow the strategy), it may no longer work.

Inconsistency is real, whether you freelance, manage teams, or have a “stable” job. If you take a loan, it sounds great that you commit to “work extra hard” to pay it back. The problem is expectations: you don’t know how much you’ll make. What do you consider a safer reference, your lowest-income month, or your best one?

#5 Inflation

Let’s assume you got all covered and are truly proficient at personal finance. You have the discipline to follow your budget and save money every month. But after a certain point, you barely grow your account.

That’s the problem of having one linear source of income. If you live in the States, you might expect the dollar to evaluate at least 1-2% per year. It doesn’t take much thought to see that the more you save, the more you lose. 

And when we’re talking of a job, it’s not money what you’re losing, but time.

We know, if currencies devalue, technically you have reduced your debt. But it limits how much financial independence you can achieve later. When it comes to debt, it’s all about freedom.

#6 Lack of services

Needless to say, you don’t control what happens to the economy or the world. We don’t want to wish it for anybody, but things happen whether you’re ready or not:

  • A familiar needs to finance a life-death medical procedure
  • You have an accident, or something happens to your house or car that your insurance doesn’t cover.
  • You pass away, but the burden goes to your loved ones.

The best way to prevent these situations is to be ready for everything. Are you financially prepared? If not, what are you waiting for?

#7 Bad actors

If you don’t take control of your money, someone will try to take it. That’s why you can’t overlook the people you choose to trust. Many scammers are searching for you right now, even if you have no money. 

Although we’ve covered many schemes here to keep you safe, you should start by protecting against identity theft, the single most expensive mistake you can make.

Once the wrong person can access your accounts, it won’t be long before you start finding surprises on your history: new loan applications, subscriptions, and no money in your balance.

Here’s the thing: with enough money, one can get out of debt almost instantly. But if the impostor has misused your identity, it may take up to seven years to restore your credit score, for example. Don’t compromise your future when it’s so easy to prevent.

Was that too much? We know you’re looking for practical tools here, and we will share them. But what’s the point if you don’t know what you’re doing wrong? Can you prevent yourself from getting into more debt later?

If you don’t check these, you’re going to make those mistakes.

How To Take Control Of Your Finances TODAY

You will see how most strategies relate to the points we’ve shared.

Step one: understand where you are. There’s no valid advice unless you know your numbers and what it takes to pay back your debt. Hence why you may not know what to do.

Once you address the situation, your mind will start to work on those problems, even if you don’t know the answers yet. Here’s how to take control of your money:

#1 Overcome the emotion

Many of us already know the risks of getting into debt, but we justify the decision with emotion. If you already owe money, you first need to stop getting into more debt.

The idea behind overspending is risk aversion. When you’re already losing, people risk more money for a chance to win everything back (aka more money will solve my problems). Those who behave this way haven’t accepted the problem, thus preventing themselves from the solution.

  • Wait 24-48 hours before making a decision. You can write down why you think it’s a good idea. Come back later, and you may think differently.
  • Do less stuff. The more you expand, the more likely you are to have distractions and complexity. Having too much choice fatigues the brain, so you spend money on things you shouldn’t.
  • Take it seriously. Don’t just do it for big financial decisions, but everything. You may be familiar with it: you find a nice deal (or convince yourself), but then some unmentioned costs appear later. Had you known it would cost that much, you wouldn’t have made that first small purchase. Try looking beyond the price.

#2 Track your financial history

We promise you won’t need to spend two hours a day on this task. Tracking should be simple and take a few minutes, if not done automatically. 

You do want to be as detailed as possible, but the only metric you should track is the one or two that determines everything else. Try to be practical and look for correlations. Maybe:

  • You earn $150 after working 8 hours, then make less money if you do too much (e.g., over 9 hours).
  • As a business, the fewer support tickets you receive, the happier your customers are.

To make it easier, reduce the number of accounts you have to one credit card, savings, checking account. Or you’ll spend hours a day trying to understand those numbers, and it will still be wrong.

#3 Get help

It’s hard to commit to paying it back when you don’t know how much you owe. Things may get so confusing that make you think you’ll be in debt forever.

When it comes to personal finance, every dollar you invest in your money makes more of it. Chances are you’ve spent more energy thinking of what you need to pay rather than making that money. If you want to focus, you can’t be worrying about these numbers.

Instead, get help from an advisor, a tax accountant, an agent who can negotiate/settle your debt, someone to help you qualify for benefits and deductions, or just a familiar with financial experience.

#4 Make a monthly budget

It can be frustrating to owe money when you’re already earning a lot. Do you think you’re spending too much for no reason? 

What if the way you budget money doesn’t work? Do you assume fixed expenses every month, without thinking of the unpredictable?

Whether you’re in debt or not, you can’t control finances if you’re unaware of your earnings and spendings.

How To Budget Money?

To put it simply, you find out what you owe and deduct it from your net income. But if you started spending what’s left without thinking, you’ll get into debt because of surprise expenses.

A smart budget will assign priorities and allocation to each spending category. It also helps you set the right expectations: you either spend what you expected or if it didn’t happen, you save. It’s better to be pleasantly surprised than disappointed.

Instead of taking absolutes, look at ranges of how much you earn and spend per month, then take the minimum income and maximum costs. It will ensure you, at least, break-even in the worst-case scenario.

Here’s how to get started:

  • Gather sources of information: subscriptions, accounts, bills, statements.
  • Estimate your lowest income level in the past 3-12 months.
  • Identify both fixed and variable expenses.
  • Create a list of unexpected events and their cost. Realistically, how often can you expect each of these to happen?
  • Allocate your money with what’s left. Don’t worry if you got negative numbers on your first budget. The point of this exercise is to spot financial inefficiencies so that we solve them later.

You neither need a dozen different categories to organize your money. The only ones you need are your monthly costs (if variable, take the highest range), emergency expenses, emergency funds, and free-spending.

If the month has just started and you already spent most of your budget, slow down to make it last for this month, even though you saved enough.

#5 Stop Worrying

You don’t need to spend thousands these days to track your metrics. Having a single credit card will keep all the expenses there, registered automatically. You can have dozens of credit lines to boost your score but use only one or two.

When owning several accounts, use programs like Personal Capital to have it all in one place. 

#6 Take Advantage Of Deadlines

Aren’t you tired of dealing with the same debt for years? You may have thought of refinancing at a lower rate. But failed payments affect your credit score for up to seven years.

Before you do, check if your debt has met that condition. If it did, you can now recover a high credit score and qualify for better rates. Mind that you still need to pay for it, even though it doesn’t appear in your history.

What debts are forgiven at death?

You may have your reasons for never paying lenders back. Perhaps you have been avoiding them for so long that the interest has driven your debt to unimaginable numbers.

If you can’t qualify for debt settlement/forgiveness, you can get rid of it when you pass away (if that’s even a benefit). But if that happened, you may not want your loved ones to take your burden, alive or dead.

Some debts get forgiven on one’s death while others pass onto others. As a general rule, whoever owns the asset should resume the payment.

Collectors may also call your close family, but they cannot enforce the compensation. In fact, they must respect their choice if a familiar asks to never contact them again, for example.

For the most complex cases (medical), hiring a specialized attorney will make your life easier. As for the rest:

  • Mortgage: Whoever inherits the property takes over those payments. Otherwise, the executor can pay it out of the estate.
  • Car loans: The same terms apply as in the mortgage case. If payments stop, the lender can take action and get the car back.
  • Credit cards: Since cards aren’t tied up to assets, only the owner has to pay back the debt, unless you live in the community property states. Authorized users can still utilize it without having to take over the debt.
  • Home equity: Lenders can force beneficiaries to repay it immediately or sell the property. If so, the new owners would continue those payments.

How To Pay Off Your Debt Right Now

Now that you have everything in place, we can talk about solutions. It will, of course, not get fixed overnight, but there’s still a lot you can do to lower your debt.

#1 Claim money that you already own. 

Do you need more money? Cancel what you’ve already paid if possible. Check your product guarantees and sell the items you don’t need. Request refunds for subscriptions you weren’t using. You could get an extra $300.

#2 Prepare your repayment strategy.

You can either arrange your debts by cost or by interest and due date. As a rule of thumb, the debt that will cost you the most requires the most attention.

In the debt snowball strategy, you quickly make progress by “killing” smaller debts first while still covering minimum payments for everything else. It’s smart because those small sums are more likely to grow faster (consider payday loans with 400% interest).

Although you will leave your biggest debts for the end, completing the smaller tasks generates momentum. You’re more likely to keep paying once you’re going.

Your other choice, the debt avalanche, prioritizes paying high-interest debts before these grow. 

What do both have in common? They try to prevent debt from becoming worse, rather than paying as much as possible. See? Although you’ll need money, that’s not the real problem.

What happens when you pay without a strategy? It will grow faster than you can cover it, and any payments become a waste of time.

It works better to combine both, so you start with the snowball to get momentum and keep on with the avalanche. Start with the small ones with the highest interest.

If you only owe to a single lender, start by negotiating the interest rate or settlement. It’s easier said than done, but you don’t lose anything by trying.

#3 Refinance

As general advice, you should avoid refinancing. If you’re halfway through the process, starting all over again becomes more expensive and not worth the time. That’s because the first thing you pay for is the interest.

If you have improved your credit score, refinancing makes sense. Let’s say your lender has unreasonable rates, and you have been in debt for over seven years.

Not only it doesn’t appear in your credit history anymore, but you can find the same loan for a better rate. With your new score, you can negotiate or take a loan to cover the first one. Just make sure you can pay for it to not get into deeper debt.

How to get a loan with bad credit?

It’s not impossible but risky and not worth it most of the time. After a few hard credit checks, most lenders may reject your application.

On the other hand, you’ll find those who will accept anyone, no matter your history and amount needed. It may be what you’re looking for, but understand no lender does it. Perhaps it’s a predatory lender or a scammer with different intentions.

You can recognize them for their faulty website designs, intrusive marketing tactics, and one-size-fits-all rates.

Because most scammers target borrowers in need, we had to warn you about them first. Now that you know the risk, start sending applications.

We assume you already tried asking friends and family since it’s the best way to borrow. Some people won’t mind, depending on your reputation.

So, did you already apply and got rejected everywhere? You have two options:

  • Joint accounts/cosigning: 

You can’t borrow money, but you can borrow someone else’s score to qualify for the loan. By cosigning, you’re making both people responsible, so that both make sure to pay back if the other falls behind. 

It’s better than asking for money, but some may not want the responsibility. What if you can’t pay back, leaving them with the burden? You will need some trust and a proven plan before getting help.

  • Supplantation:

Instead of applying, ask a person with better credit to take the loan, then send you the money. Thus, you can get rates for an 800 FICO score while having 600, for example.

Relying on another person has its pros and cons. You enjoy the money, but paying the loan will affect the other person’s score, not yours.

#4 Create more time

You can only do so much with a saving mentality. And we doubt that working harder at your job will be enough. Most of you are already doing it. What if your debt grows faster, but you only have 24 hours a day to earn?

You cannot find solutions unless you spend time on a problem. The more you do, the sooner you will get rid of debt.

Time management could be the reason you owe money in the first place. What if your money problems were actually income problems caused by time management? If you don’t have enough time, you may have assigned the wrong priorities, or paying back debt isn’t important enough.

But you wouldn’t be reading this if you didn’t want a solution. Whether you want a career promotion or succeed in business, more time will make it happen, not money.

We mentioned before that doing less stuff will help you reduce expenses. On top of that, you’ll have fewer things to do or think about, so you can focus on repaying.

How To Prevent Debt And Create Lasting Wealth

If you could go back, would you prefer not to borrow money instead? How much interest have you accumulated? Most people underestimated what it would take to pay the amount back.

The more money you make, the less you will need to borrow it. And no matter how uncertain the world may be, you can still get over debt and save money fast.

#1 Respect your budget and allocation

We set rules so that we know what decisions to make when things get confusing. If you don’t follow your own directions, what’s the point of budgeting money? You have to believe that your allocation will make the most money long term.

Sometimes, you will see no point in following it when the world tells you to do the contrary. Sometimes, you do and find out you were right. But when should you change your strategy?

Since it depends on your risk tolerance and personality, you should adapt it as you change. 

#2 Create an emergency fund

Do you think you lost a lot of money? There are still countless future moments when you will lose, perhaps more than so far. It may be something unpredictable or a mistake you will make.

Assuming mistakes won’t happen not only is unrealistic but prevents you from thinking of emergency plans. So it only takes one error to break your whole strategy.

Instead, create an emergency budget you will only use in the worst situation. Lost your job? Terrible economy? If you’ve saved six to twelve months’ worth of living expenses, you can keep on your activities until the storm passes.

#3 Have a growth mentality

Given that most of you are in debt already, the question may sound counterintuitive: How can I afford it?

There’s no better way to grow than to make money, not just save it. And to do so, you may need to invest in yourself and some financial tools, whether you have the money or not.

If something gives you a high return on investment, you may want to spend more than you can afford. If you’re experienced with debt, you can borrow money to reinvest faster.

Debt can be beneficial when used for the right goals. Besides, you will be more motivated to increase your income when you owe money.

With a good plan, you can leverage someone else’s money to accelerate your wealth. Without “good debt,” it would take much longer to reach those numbers. If you have an excellent credit history, you could get more capital at flexible rates.

#4 Overprotect your credit score

It takes years to build up credit and only a few misfortunes to bring it down. Even the dumbest mistakes— such as missing a payment by accident— will lower your score for at least seven years.

If you plan to make big purchases, a bad credit score may get in the way. People in debt will have likely experienced the limitations. What frustrates them the most isn’t the score drop itself, but how easily they could have avoided it.

The bad news is, human beings make mistakes all the time. You will do something wrong at some point with no way to revert it. The solution? Don’t underestimate your finances.

If you need to pay your bills on time and have no money, don’t wait until the last minute to make it. Preferably, send the payment a few days or weeks before the due date. So if you get it wrong or forget about something, you have all that extra time to save the situation.

#5 Create additional sources of income

If all you’ve learned so far, it’s more than enough to solve financial issues and save money. However, you always risk falling into debt again if you rely on a single source, no matter how stable it is.

Why? Mistakes are human nature. Uncertainty is everywhere. Problems are always coming.

Just because you got out of debt or never been there, it doesn’t mean it couldn’t happen to you. If emergency funds are important, multiple income streams are mandatory.

This advice, of course, applies if you make big numbers with that source. There’s no point in starting seventeen businesses making $300 per month each. Take your time mastering each one, but don’t forget to try new ideas later.

Wrapping Up

Even after reading all these tips, you might be wondering: “When will I make all the money I need?” Probably once you give it all the time you have. And time equals priority.

Let’s say you have a decent credit score and social network. If you try to refinance or borrow from friends, you may lower your debt in less than a week.

Depending on the amount you owe and your income, the whole process could take from three weeks to three months (assuming you give it all your time). 

Before thinking of speeding things up, make sure you’re not slowing it. Control your spending and set smart financial habits.

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