Building an Emergency Fund
It might sound counterintuitive to build an emergency as you try to get out of debt – that money could be going to paying off the debt instead of putting it in a savings account – but it is a good idea to do this because it can help prevent you from going deeper in debt. The savings are going to be a safety net when you have an emergency expense because you don’t have to reach for your credit card. The ideal emergency fund is 12 months living expense, but you can start with just $1,000 then build up your emergency fund. Put whatever you can manage into this account.
Picking a Debt and Giving it Your All
There are those who will choose to increase their minimum payments by a little, but this results in their payments dropping by a small amount every month. If you want more noticeable progress, then consider one big payment on one of the debts each month until you have completely paid off the debt. During this time, keep making the minimum payments on all the other accounts. Once you are done with one debt, move on to the next one and repeat the same process until you have paid off all your debts.
Asking for Lower Interest Rate from Creditors
Higher interest rates are bad for you because you are going to be in debt longer because much of your payments are going to the interest and not the actual balance. The good thing is sometimes interest rates can be negotiated. It can be as simple as asking your credit card company to offer lower rates. Creditors can choose to do it or not. Customers who have good payment histories have a higher chance of negotiating lower rates.
Seek out promotion to find lower interest rates. If you choose to use balance transfer for a lower rate, then you should try your best to pay off the balance before the expiry of that promotional rate. The balance is going to be subjected to higher rates when the promotional period is over.
Looking for Ways of Putting More Money Towards the Debt
The more you put on towards the debt, the shorter the time it takes to pay it off. You should have a monthly budget because it helps in managing your money. When you have expenses in a budget, you will have an easier time figuring out how to cut down on your expenses and use the savings on your debt. Another option for coming up with extra money is by selling items you no longer need or generate income from a hobby. If you are facing a financial emergency consider taking out a loan for rent.
Withdrawing from Your Retirement Fund
You can decide to pull money from your retirement account to use in paying off your debt, but this is in extreme cases. You should be careful with this because you can face withdrawal penalties and tax liabilities if you do it before you are 59 ½. The penalty is going to depend on the retirement account you are drawing from and how you are going to spend the money. The standard is a 10% tax. When retirement comes, you are going to have less money – this is both from the money you withdrew and the dividends, capital gains, and interests you could have gotten if you had not done it.
There are some work-sponsored retirement plans that allow you to borrow from your account, e.g. 401(k). There are risks with this approach. If you happen to leave before paying back the loan, then it puts you in a worse financial position.
Cashing out Life Insurance Policy
Have you accumulated cash in your whole or universal life policy? You can use the cash to pay down your debt. This is a risky strategy, just like tapping your retirement funds, it has tax consequences. Another option is borrowing from your insurance policy, but it is going to affect what beneficiaries receive.
Settling with Your Creditors
Debt settlement is another solution for those with accounts that are past due or those owing more than they could repay. When settling debts, you are going to ask creditors to accept a lump-sum one-time payment to cover the debt. Creditors who accept this usually agree to cancel the rest of the debt, but they do this for accounts that have defaulted on at risk of defaulting.