Many of us struggle with debt on a daily basis without making much progress. In fact, I recently pointed out that 50% of Americans have used up their credit cards!
That being said, if you finally have some extra cash at the end of the month, I suggest you keep it until you have two important things in place. Paying off debt might sound like a good idea, but it can turn out to be a bad decision if you don’t have budget and emergency savings in place.
A plan for your money is more important than paying off debt
If you currently don’t have a budget, you shouldn’t spend any money until you have one in place. For as long as I can remember, budgets have had a bad rap. If you talk to someone who successful budgets, they’ll tell you how empowering and liberating a budget can be. A budget is a plan that gives you the ability to tell your money where to go rather than letting your money control you.
Despite popular opinion, living on a budget doesn’t mean you can’t enjoy life anymore. In reality, a budget gives you the power to spend your money on what you really value in life rather than wasting it out of habit.
There are an unlimited number of examples of people earning an average salary and being able to get out of debt and build wealth. With a good budget, you can not only make a plan to eliminate your debt, but you can also figure out how to pay off all the items on your dream bucket list.
You are your best insurance policy
Right now, your credit cards can be your insurance policy when life arrives. Rather than relying on a bank that is willing to charge you 16% or more for borrowing money in an emergency, you can be your own insurance policy.
If you start a budget as mentioned above, you can start delegating a certain amount of money each month to go into an emergency savings account. This account must be fully funded with $ 1,500 to $ 2,000 before you start paying off your debts. The reason is to prevent your car from breaking down or other financial problems returning to a credit card.
If you don’t have money in a savings account and are forced to put money back on a credit card, you back off. If you have emergency savings and an unforeseen money problem arises, you can withdraw money without having to increase your debt.
With this method, you are your own bank and you can protect yourself against additional debt.
How to quickly finance your emergency savings
If you live paycheck to paycheck, the idea of funding an emergency savings account with $ 1,500 to $ 2,000 may seem impossible. However, if you create a budget and revise your spending, you will be able to clearly see where you are wasting money. By reducing unnecessary spending, you can direct that money toward your emergency savings.
In addition to reducing your expenses, there are a number of ways you can increase your income as well. You can take a profitable gig from your couch, or another part-time job to quickly reach your goal.
If a part-time job doesn’t work in your current situation, you can organize a garage sale and start selling things that you don’t use or can live without. Most of us have closets full of things we no longer use or need. Start organizing your closets and find what you can put up for sale online and what you can sell down your aisle.
The debt repayment balance
As you have probably noticed, credit card balances are difficult to pay off due to the high interest rates and compound debt. If you’re struggling with debt, emergency savings will keep you from adding to your debt.
If you are forced to withdraw money from your emergency savings, stop paying extra for your debt until you replenish your fund. When the savings account is full again, start attacking your debt again.
By using this formula, you can avoid taking on more debt and pay off your remaining balances much faster.
I have a budget and emergency savings – What now?
When you have these two essentials in place, you can begin to tackle your debt! The two main methods of debt repayment that are constantly debated are Debt Avalanche Method and Debt Snowball Method. Either method will pay off your debt quickly, but each has its own advantages. Depending on your personality, one method of paying off debt may be better than another.
Even with their differences, they both recommend paying off debt the same way:
- Pay the minimum on all your debts except the one you want to pay off first
- Put all your extra money in debt at once
The major dispute revolves around which debt should be tackled first and in what order. What is better? Well, would you rather drive a BMW or a Mercedes? Ask two people which is better and they will give you a different answer. It all depends on preferences.
Paying off debt can be scary, but if you’ve made the decision to free yourself from it, make sure you prepare for success! Make sure you have a budget and emergency savings in place before you tackle this debt. Without these two elements, you will surely find yourself in debt again. It is also important to understand the difference between being rich against rich. This will help you stay focused on your goal.
It’s time for you to take back your life and take control of your money. You owe it to yourself!