Getting out of Debt

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For most people, once they get into debt, it can be an extremely long and hard road back to financial freedom. One of the stark realities of debt is that it's often the additional costs of penalty charges and higher interest rates that prevent many people from making a dent in their debt amount in the first place. Indeed, some people actually end up in a situation called negative amortisation, whereby spiralling charges means that the debt amount actually increases each month despite payments being made. Unfortunately this is a slippery slope to bankruptcy and once you're on this slope it's extremely hard to put the brake on.

There are however some very practical steps that you can take to minimise the penalty fees and tackle the debt.

Identify the problem

The first step in eliminating your debt problems is to acknowledge that you have a debt problem and identify exactly how and why that problem arose. This might sound like an obvious step but many people find themselves with debt problems because of a reluctance to acknowledge that their spending habits were pushing them gradually, or not so gradually, into financial ruin. By taking a cold, hard look at your finances you can acknowledge the problem and resolve to do something about it. If your debt problem is the result of too much credit card spending, cut up your cards. If the problem lies with the fact you simply spend more than you earn, create a budget and look for areas to cut back.

Acknowledge that you have a problem, identify how and where that problem arose and resolve to do something about it.

Your personal resolve

Getting out of debt is going to be hard work. It's also probably going to take quite some time so you need to get into the right mind-set to prepare yourself for the challenges ahead. Like going on a diet, studying for an exam, or anything else that takes a lot of personal discipline and motivation, sometimes it's a good idea to step back, take a few deep breaths and mentally get into the right groove to tackle this problem. At the end of the day there really is only one sure fire formula for getting rid of debt - and that is to increase the positive difference between your income and your expenses and to use as much of that difference to service your debt. To do this you will have to mentally challenge every purchase you make and consistently be on the lookout for areas in which you can cut back in order to pay off your debt faster.

Have a plan

You'll make much more headway into paying off your debt if you have a plan of attack that you can adhere to (or try to). Creating a budget is a powerful way for you to analyse your spending habits and to help you formulate a plan of attack for maximising your payments against your debt.

Obviously your plan of attack needn't be etched in stone because circumstances can and do change from day to day, week to week and month to month. Use it merely as a guide to help you as you go and revise it where necessary if you think it is too hard to adhere to, or too easy. But no matter what plan you devise, the basic formula will always be the same - spend less money than you earn.

Set goals and objectives

The road to paying off your debt is likely to be a very long one so it's a good idea to set yourself short term goals that you can aim for. Not only will this help you to stay focused more easily on your objective but it's also very good from a motivational point of view. As you attain each short term goal, give yourself a little reward as a further incentive to reaching the next goal. Don't set your goals so high that they are impossible to attain as failure to do so will likely result in a complete abandonment of your debt reducing efforts and you could actually end up compounding the problem out of frustration.

If you do miss some of your short-term goals don't let that affect your long term objective. You will have some weeks that are better than others and it will always seem like life is trying to derail you with unexpected bills and expenses. Stay focused, and if you do happen to miss one or two short term goals let that be even more motivation for achieving the goal the next week.

Tackling the debt

The first thing to do when tackling your debt problem is to talk to the people to whom you owe money. Chances are you are being hit with penalty charges and perhaps high interest. Be honest and polite with your creditors and approach them with a plan to pay back the money. It is always in their interest to help you pay them back so they might be willing to put a freeze on the penalty charges as long as you continue to service the outstanding amount. Although having to make such an approach can be quite humbling and embarrassing you could potentially save yourself a lot of money by doing so. You certainly have nothing to lose.

The next step is to identify the loans that are attracting the highest interest or penalty charges and target those to pay off first. Then pay off the next highest and so on. Ensure you service all of your loans even if you’re focusing on paying off one in particular – don’t be incurring unnecessary penalty fees and higher interest where you don’t have to. If consolidating your debts to a lower interest scheme is an option then it's something that you should consider, but remember to factor in termination fees, set up charges, and any other hidden charges that might make consolidation not worth it.

As you pay off each one of your debts you’ll free up disposable income which you can use to service the next debt etc. Over time your disposable income should snowball so that your debts should become easier and easier to pay off. Don't forget to reward yourself after you clear each debt before moving on to concentrate on the next, but do use as much freed up disposable income on your outstanding debts – don’t be tempted to spend up large just because you have a little extra cash.

If you’re buried under a large mountain of debt a large portion of the battle to getting rid of that debt is going to be your mental approach. Gear yourself up mentally to tackle the problem head on and to change the habits that got you into the situation in the first place. It’ll be a long road ahead, but the destination will be worth it.