One of the most important steps in taking the road to financial freedom is getting yourself free of debt and then staying that way. It is a sad fact of modern life that people have become more and more used to being permanently in debt, living on their credit cards from month to month. And because of the interest on debts (and particularly on credit cards) this is no way to live when you are trying to save money for the future. All the compound returns in the world won’t help if you are accruing credit card interest every month. This is why you need to be debt free before you can even start to think about getting your budget sorted and investing in your retirement fund. The following steps should help with this process:
In the same way that you drew up a budget for your outgoings, it is also vitally important to set up a spreadsheet (or similar) to detail all of your debts and how much you have to repay every month. This will help you to see which debts are costing you the most and are the hardest to clear and allow you to think about both the total money you owe as well as the total you have to pay out every month. You should also make a note of the interest being charged on each debt as this will help you put the debts in order of priority. Once you have done this you should then draw up two figures. First, the minimum amount you can get away with in monthly payments. And then secondly, the amount you could afford to pay out above the minimum, in order to clear your debts more quickly. This extra money should be used to overpay on the credit card (or debt) with the highest interest rate and then once that is cleared, the next highest and so on.
If this all sounds too difficult and you feel like you are drowning in debt, don’t worry – there is light at the end of the tunnel. You can speak to a debt advisor or a debt charity and they will help you put in place a plan to clear those debts, usually by going around and negotiating with all of your creditors some kind of repayment plan that is manageable. In addition to this they will be able to tell you which laws and regulations there are that can help you out and even whether you are a suitable candidate for bankruptcy.
If you have a number of debts across a number of different store cards and credit cards it may be worth talking to your bank about a single loan to repay all these debts and allow you to clear the debt in one place with a manageable repayment each month. This is often the best way to get on top of debt although the key thing is to ensure you don’t then get more credit cards and allow then to build up again while still repaying that loan!
One easy route to cutting down your monthly outgoings is to keep an eye out for 0% interest deals on credit card transfers. These offers come around regularly and are an eye-catching way for credit card companies to get new customers. They are also an easy way for you to clear your credit card debt much more quickly and give yourself a bit of breathing room in handling your debts.
The biggest debt people will likely have is their mortgage. The question of whether to pay this off before saving to invest is one that a lot of people ask themselves when planning ahead. In the end it comes down to how you want to approach your retirement plan and also whether it makes more sense financially. For example, clearing your mortgage early can save you an awful lot of money in interest payments down the line, but only if you have a flexible mortgage that allows you to overpay and does not charge you penalties for doing so. Also, it is worth bearing in mind that if you choose to pay off your mortgage rather than save money, you will not be able to use the extra savings you make if you need them, whereas if you put your money into savings, you can always use it at a later date if you were faced with that proverbial rainy day. The most sensible approach is probably to see if you can do a bit of both – a little extra each month on your mortgage, and a little extra into your savings account.
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