Many people plan out their life, especially their finances. Historically, except if one starts a really successful company or inherits a trust fund, one would have to work hard and be financially literate to build wealth. That’s because building wealth isn’t always easy, even for high-income earners. Why? Because to build wealth, one would have to save and invest a significant amount of one’s income.
Another reason some people have struggled to achieve financial independence is paying off debt. A good case to consider would be student loans. In the US alone, 42.8 million Americans have student loans and the average federal student debt balance is over $37,000. According to the Federal Reserve Bank of St. Louis, student loan debt in the US runs into the trillion territory. Precisely $1.75 trillion is owed in federal and private student loans in the United States of America. Click here to learn more.
With many young adults beginning their adult life paying off debt, it’s easy to see how many people struggle to achieve financial independence. But living a debt-free life is possible and people have been able to pay off loans, build healthy investment portfolios, and retire early. It all depends on how badly one wants to lose the “borrower” tag and one being a little more financially prudent. More than anything, however, the mindset you carry can influence how soon you can be debt-free or if you ever become debt-free. In this article, we’ll go over a few steps you can take to never have to worry about loan providers knocking on your door.
Get an Overview of all You Owe
The first step will be to put all the debt you want to pay off in one place to get an overview of everything. You can do this by creating a spreadsheet. List all the loans in descending order from the most expensive to pay off to the least expensive. Now, bear in mind that the actual amount owed does not always determine the most expensive of them. What you want to look at are their interest rates. Those with higher interest rates should come first since they can quickly grow into ridiculous amounts. List out the debt type, the amount owed, the interest rate, the installment amount, and the repayment deadline. Your sheet should look something like this:
|Loan type||Amount||Interest rate||Installment amount||Repayment deadline|
|Student loan||$43,000||28.96%||$500||10 years|
|Credit card||$28,000||26%||$1500||2 years|
|Car loan||$45,000||15.5%||$1500||5 years|
When they are all listed out, it is easier to put together a plan. Also, having them in black and white makes it less daunting than how it often feels in our heads.
Refinance all Existing Loans
When you refinance, what happens is that you pay off the existing loan with a new loan that has more favorable terms for you. Usually, the new debt comes with a much better interest rate, a more favorable repayment term, or a lower monthly payment. Ideally, when refinancing, you want to get a deal that is most convenient for you given your current financial situation.
Someone who has become much more financially capable than when they took out an existing loan may choose to pay it off quickly. To do this, they would refinance the existing debt with a new one that has a shorter repayment term and higher monthly payments. The same can be applied to those who would want lower monthly payments. You can also consolidate all existing debt into one through refinancing which makes repayment a lot easier and much less scary. Once you consolidate your loans, you no longer have to make separate monthly payments which can be quite expensive. You can visit this website: billigeforbrukslån.no/bli-kvitt-gjeld/ to learn more.
Cut Unnecessary Expenses
It is impossible to pay off debt if you don’t have any money to actually pay off the debt. Very often, we make these little expenses that at the moment don’t feel expensive. However, over time, they add up to significant amounts. Take Starbucks coffee, for instance. Most people take the Grand Caffe Latte every morning which costs $3.65; pocket change you would say. Multiply this amount by 30 days and that is $109.5 spent every month on coffee alone.
If we factor in other little expenses like eating out or bar time with friends, total costs can run into several hundreds of dollars. While we’re not against enjoying life as much as one can, we advise that unnecessary expenses like these be cut off until all debts have been cleared. Now, to cut expenses, you’d need a budget.
Create a Budget
A budget works best when you know exactly how much income is coming in every month. Once that’s settled, you want to list out all fixed expenses such as rent, utilities, insurance, and the loan you are left with after refinancing/consolidating.
The next step is to decide how much can cover groceries and any other minor expenses like eating out with friends if it’s unavoidable. For this latter part to work, you would want to be as realistic as possible. Done right, budgeting will not only keep you on top of your expenses but also help you save significantly. There are a ton of free budgeting tools online that you can get started with today as you take another step towards living a debt-free life.
Increase Your Income
This can dramatically improve your chances of paying off loans and it should probably be something you’re always working towards. With a little extra cash, you can get so much done and not just settle loans. There are several ways one can increase one’s income including:
- Getting a better job
- Asking for a raise when you feel you’ve earned it
- Starting a side hustle, e.g a Shopify or Etsy store, selling online courses, affiliate marketing, etc.
With a side hustle, one can earn extra income from several hundred to thousands of dollars, and sometimes millions. There are many stories of people who quit their full-time jobs to focus on their side hustle because it brought in more money.
Postpone all Investment Plans
This should be an easy decision, right? However, you’d be shocked just by how many people allocate a portion of their earnings to investments. Financial experts advise paying off unhealthy debts before looking into investment. The reason is that the interest rates on these loans are often far greater than the interest one can earn on most investment vehicles.
Also bear in mind that unpaid debt affects one’s credit score which can be an incredibly valuable asset. That said, doing both is still possible. For instance, if you don’t have an emergency fund, you could set aside a portion of your earnings for this. Rather than leaving the money in your bank, you can utilize a money market mutual fund, a low-risk, and highly liquid investment. Click here to learn more about money market mutual funds.
As we mentioned earlier, living a debt-free life is possible and many people have come out of really nasty debt situations. It takes determination, self-control, and a lot of planning which can be demanding. But aside from paying off all existing loans, the process itself will make one a lot more financially prudent which is an invaluable skill.