Debt can be a paralyzing financial burden and it can take a toll on our mental and emotional wellness. When debt starts to pile up and you feel like you’re drowning, there are a few steps you can take to get back on track. The first is to identify what type of debt you’re working with so you can assess the best way to tackle the problem and make a plan to start reducing or eliminating it. Once you have a strategy in place, stay focused on your plan and make it a priority. Lastly, make sure you have a budget in place so you don’t risk falling back into bad financial habits.
Identify the Type of Debt You’re Working With
Step one in determining what to do when you’re drowning in debt is to identify the type of debt. Generally speaking, there are two types of debt, secured and unsecured. Secured debt is debt that is connected to a specific asset, such as a loan that is used to purchase a home, car or other item. This type of debt usually has lower interest rates and can be easier to negotiate and restructure. Unsecured debt, on the other hand, tends to have a higher interest rate and is not connected to any asset. This type of debt includes credit cards and personal loans. Additionally, it is important to note that there are also various types of unsecured debt, such as student loans and medical bills, which often have unique repayment rules or deferment options that you can explore.
Assess Your Lender Options
Once you know the type of debt you’re dealing with, it is time to look at the best strategies to tackle it. Depending on the type of debt, you may be able to explore options like refinancing, consolidation, or negotiation with your lender to restructure your debt payment plan. If you have secured debt, such as a loan connected to an asset, there are often more options. You can refinance to lower your interest rate and monthly payments, or you may be able to use your asset as collateral to negotiate better terms with your lender. If you have an unsecured loan, such as a credit card, you may be able to negotiate with the lender to reduce fees or interest rates.
If you have multiple loans or other debts from various lenders, you may also be able to consolidate them into one loan with a lowered interest rate. There are several lenders that offer debt consolidation services, but it is important to do your research before committing to one. You may also be able to work with a non-profit credit counseling service or debt relief company to consolidate your debt and potentially have them assist you with negotiating better terms with your lenders.
Set a Budget and Stick to It
Once you have a plan to tackle your debt, it is critical that you create a budget and stick to it. Having a budget will help you to identify areas where you can free up extra money to pay down your debt and create a path toward financial freedom. When creating your budget, it is important to include fixed expenses, such as your mortgage or rent, car payments and loan payments, as well as variable expenses, such as groceries and entertainment. Once you have your budget in place, you can use any extra funds to pay down your debt faster.
Focus on One Debt at a Time
When you’re trying to pay down your debt, it can be overwhelming to tackle multiple loans or debts at once. However, there is a strategy that can make it easier, called the debt snowball method. Under this strategy, you focus on paying off one debt at a time, starting with the one that has the lowest balance. For example, if you have three credit cards with respective balances of $2,000, $3,000 and $5,000, you should focus on paying off the $2,000 balance first. Once you pay off the first debt, you move on to the next debt, which should now be the $3,000 balance credit card. This method will help you to focus on one goal at a time and not get overwhelmed by the total amount you need to pay back.
When you’re drowning in debt, it can be overwhelming and devastating. However, it is important to remember that it is possible to get out of debt and regain financial independence. The first step is to identify the type of debt you’re working with, then assess your lender options, create a budget and stick to it. Additionally, focus on paying off one debt at a time by using the snowball method. With the right strategies and a little discipline, you can get out of debt and move forward with a brighter future.