Reducing your debt should be the first stage in any financial strategy. Debt can hold you back from bigger financial goals, such as buying a home, starting a family, or taking your dream vacation.
The best path out of debt depends on your individual circumstances. It should be informed by factors like the amount of debt that you owe, the type of debts that you’re carrying, the assets you own, your income, and more. However, these are some of the options that are widely available for people who are interested in starting down the path toward debt freedom.
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#1 Create a Strategy for Eliminating Debt
If you have a stable income and can reduce your expenses, you may be able to get out of debt with a smart financial plan. Getting out of debt on your own can take determination, but it can help you rebuild your credit score faster than other methods.
The first step in any financial strategy should be reviewing your budget and cutting out any expenses that you don’t need to carry. There’s no expense too small. That streaming subscription that only costs $10 a month is $10 that you can put toward debt. Changing your shopping habits can also lead to more savings. Groceries are always a necessity, but shopping at cheaper supermarkets or paying attention to deals can help free up more funds.
In addition to trimming your budget, you need a strategy for paying off your debts. One tried-and-true method is to tackle debts one at a time. Make sure you continue to make minimum payments on all debts but focus the rest of your funds on a single debt, such as a credit card or a line of credit.
It makes a lot of financial sense to pay off your most expensive debt first, but if you find you’re having trouble getting motivated, try paying off your smallest debt and working your way up. The momentum can keep you motivated to conquer it all.
#2 File a Consumer Proposal
Not everyone is in a position to eliminate their debt on their own, no matter how tightly they budget. When you can’t keep up with debt payments as is, you may need to explore other options, such as a consumer proposal.
A consumer proposal provides real debt relief. It can reduce debt by up to 80% in some cases, giving you real relief. A consumer proposal is a legal procedure where you propose rolling all of your unsecured debts into a fixed monthly payment that is within your means to pay.
Creditors have to agree to the proposal, but many do if they believe that they can recover more of the debt than they could if they filed for bankruptcy. With a consumer proposal, none of your assets are at risk, and you can get out of debt within five years.
#3 Debt Consolidation Loans
It’s important to be careful with debt consolidation, but in some cases, it can make sense. When you pursue debt consolidation, you take out a loan or a personal line of credit in order to pay off your existing debts. This way, you roll all of your debts into a single monthly payment.
Before you take out a debt consolidation loan, you have to crunch the numbers. If you can get a loan with a lower interest rate than all of your existing debts, debt consolidation can save you money. Make sure you also take into account any balance transfer fees that you might face and incorporate them into your costs.
There are many ways to get out of debt. Start by assessing your finances and researching the viability of options available to you.
