Becoming debt free is a goal many people have, however, it often seems just out of reach. To others, it seems like it is just around the corner or further down the road. Either way, becoming debt free is certainly a primary goal for many people. Whether it is credit card debt, medical bills, a car payment or a mortgage, debt is weighing a lot of people down, and they are ready to get rid of it. A debt-free lifestyle seems like a fantasy, however, it is a possibility if you take a few steps in the right direction. Let’s take a look at a few simple steps you can take towards becoming totally debt free.
Evaluate Your Debt
Many people refer to debt using two elementary words: good and bad. In reality, there is no “good” debt, however, it makes it much less scary to refer to it that way. Oftentimes, “good” debt fulfills a need while “bad” debt fulfills wants. “Bad” debt refers to high-interest rates on your debt. Oftentimes, “bad” debt refers to credit cards, which are known for their brutal interest rates. “Good” debt refers to things like student loans, mortgages and even a car loan. Each of these things fulfills a need of the person taking the debt on. Usually, the “good” debt someone has doesn’t have to be rushed to be paid off in advance.
Either way, whether most of your debt is good or bad, you have to determine how much of it you have to tackle to massive task of paying it off. You do this by determine your debt-to-income ratio. You take your monthly debts payments and divide them by your monthly income to get this number. This does not include any mortgage payments. Prior to adding in your mortgage, your debt-to-income ratio should be around 20 percent. After you add in your mortgage, it should sit at 43 percent.
Once you’ve determined your debt-to-income ratio, figure out how (and when) you will pay the debt back. The approach you take should be based on your debt-to-income ratio. If your ratio is higher than 20 percent, you may want to seek some debt counseling and advice on how to approach paying your debts off.
If your debt-to-income ratio is lower than 20 percent and more manageable, focus on the high-interest accounts first. Obviously, still make your monthly payments for the other accounts, but focus most of your efforts on paying the high-interest accounts down first. Once you’ve paid those off, focus on the lower interest accounts and get those paid off.
You have to have organization when tackling the task of repayment. You have to have a budget that includes the amounts you will pay towards your debts as well as your regular monthly bills. Set goals for your debt repayment, and make sure you stick to them. Without organization, the plan may not be successful.
Once you’ve paid your debts off, you will want to form some new habits. Obviously, you got into debt somehow, and you do not want to have to go through repaying debt again. Being “debt free” is desired as a long-term label, not a temporary one. The lifestyle you lead to pay off your debt should not be a “quick fix.” They should be long-term habits that you will follow for, well, the rest of your life.
When you get your debt paid off, you should be proud of yourself! It takes a lot of hard work and determination. You can go on to live a debt-free life if you simply take responsibility for your debt and take charge of repaying it.