When you owe large sums of money, day-to-day money management can easily become overwhelming. It can be impossible to think about how to get out of debt.
Struggling with debt is not easy, but if you don’t gain control of the situation, it can become worse. This is because interest and late payment fees can increase the total debt over time.
You will also have to think about paying essential household expenses, such as housing costs and food, in addition to the debt. So it’s understandable if you feel like you are unable to cope.
However, if you take a systematic approach, your debt needn’t necessarily be a problem. Here is our five-step guide to getting out of debt.
1. Face up to the situation
This is probably the hardest and most important step to take. You need to face up to the situation if you are to have any hope of gaining control.
Make a list of everything you owe and to whom. The idea is to make good on all your debts. The main aim is to establish a single figure that you owe at this particular moment in time.
Bear in mind that this will not take into account any future interest or late payment fees already in the pipeline. Despite this, you will have a good idea of the amount you owe – a crucial step when thinking about how to get out of debt.
Get all of the relevant paperwork together and create a filing system. Organise your debt paperwork in order of the debts that are costing you the most money in interest. These should be prioritised.
2. Track your spending
The idea here is to look at your income and expenditure over the past six months before making any drastic changes. Doing this can help to pinpoint the cause of the problem. It could be anything from a fall in your income to overspending on credit cards.
When considering how to get out of debt, you will also need to review where you can make changes.
If you are not earning enough to cover your debts, you many need to consider a second income. This could mean a second job, but you could also think about what you already have that might earn you money. For example, if you have a spare bedroom, you could rent it out.
Look at your expenditure and be honest and realistic. Plan to cook your own meals rather than eating out and cut back on expensive treats. Make sure you are getting the best deals on your mortgage and your energy and broadband suppliers.
3. Create a plan
Take everything you have learned from tracking your spending and create a plan. The plan should incorporate your income, essential expenditure and debt repayment.
Find a way to track your spending going forward. If you are serious about getting out of debt, you will have to account for every penny. Create a budget that is realistic and easy to follow.
Speak to your creditors and see if you can come to an arrangement regarding future repayments.
4. Consider debt consolidation
This is not always an option, which is why it’s important to speak to your creditors. However, when thinking about how to get out of debt, consolidating your debts into one single debt can be incredibly useful.
If you can do this using a balance transfer credit card, then you could reduce the interest on your debt. Consolidation also has the advantage of allowing you to focus all of your efforts on a single monthly debt repayment.
In addition, if you stick to your payment plan, you will know when the debt will be paid off. This will allow you to see light at the end of the tunnel – a psychological advantage that is not to be underestimated.
5. Create lifelong habits
Think about the process of how to get out of debt as the start of a debt-free life. Stick to your plan and stay focused. Develop and adopt habits that will prevent the same thing from happening again.
Start thinking about your future. Once you have paid off your debt, you can start to think about building an emergency fund and savings. This will help to keep you motivated.
Don’t feel you have to go through this alone. Share the burden by talking things over with your friends and family and discussing your plans. If you need some impartial advice, talk to the National Debtline.
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