Become Debt-Free - Tips We Can All Use

Being debt-free can be a liberating experience, particularly for those who have been tormented by worries of never experiencing the sense of freedom that comes with not owing money. The phrase "indentured servant" comes to mind when thinking of the disastrous cycle that is personal debt. Of course, getting out of debt is easier if you have less of it, or if you have more income. These two variables are precisely what needs to be focused on when digging oneself out from under bills.

Reduce Spending

Track your expenditures and cut out those you feel are not necessary. These can be day to day expenditures such as money spent on lunch or trimming your bills by canceling unused monthly services. For example, do you use all of your allotted cell phone minutes? Creativity can bring frugality to a level you may have not thought possible and can certainly help you to become debt free.

Make More Money

Making more money is often looked at as being a long term goal or something out of an individual's control. Once again, creativity and ingenuity can make things happen. Beyond asking for a raise or getting a better paid job there are ways to make a few extra dollars. Think of what you are good at and what you enjoy, do some research on how to turn it into some cash, and make it happen!

Paying Debts

Choosing which debts to pay off first can be difficult. Factors including the amount of the debt, the minimum payment, interest rate and loan type must be considered. Paying off higher interest loans first will result in less money being paid, but as pointed out on MSN Money the benefits are reaped quicker by paying off smaller loans and using the freed up cash to pay extra on larger loans.₁ My recommendation is to figure out which method works best for you. Motivation can be derived by seeing a bill paid off, yet if you do not use the extra cash to pay down the larger bills; it does little good in getting out of debt.

Considerations

Determining how to become debt free varies based on the individual. Developing a holistic view of how you want to live is a necessary component when making financial decisions. Being debt free should increase your quality of life by decreasing worry and increasing the amount of money you have to spend on the things you truly need and want. There are time costs associated with activities like making more money. Only you are capable of making these types of cost benefit analysis decisions.

Warning

Do not extend the terms of a loan to get cash or reduce an interest rate. Most loans are front loaded, meaning you pay the bulk of the interest toward the beginning of the term. This is why when you first make payments on a loan the principle drops so slowly. After the loan begins to mature, reductions in principle begin to pick up. This is seen clearly in an amortization chart, which should be given to you upon signing a home loan. When you extend the loan period, it's like starting the loan over, meaning you are paying all that front-loaded interest again.