We all know that having debt is no fun at all. It has the ability to restrict you in everything that you want to do.
I’m sure you have lots of financial goals that you want to accomplish and having debt does not help the situation.
How can you get out of debt when you are broke?
It can seem like an impossible situation to begin with but it doesn’t have to be. If you put the right principles into place you can truly achieve your dream of becoming debt free.
You just have to want it badly enough.
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What exactly is debt?
According to this source the average American has just over $38,000 of debt. That’s a lot of debt to be walking around with.
Debt happens any time you owe money. It could be that you owe, the bank, your school or your friend.
Anything that you borrow and have to pay back is classed as a debt.
Even if you have permission to pay the money back at a later date it is still classed as being debt.
Believe it or not, there are in fact 2 types of debt that you can own.
Good debt is where the money you have borrowed will eventually grow and give you some type of valuable return for your money.
Bad debt is the opposite of good debt where you are not going to get a return for your money.
This could be something like money you owe on a credit card or paying for a car on finance.
*Note that there is a very fine line when it comes to good versus bad debt because good debt can quickly go bad.
If you take out a loan to pay your school tuition fees but then decide that you no longer want to go to school anymore the money that you had borrowed will no longer give you a return and is now a bad debt that needs to be paid off.
Some examples of debt are:
- Car finance
- Credit card
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How to get out of debt when you are broke:
1. STOP Borrowing!
The very first thing that you must do is to stop borrowing money.
You will never be able to get full control of your finances if you continue to borrow more money on top of what you already owe.
That means no more borrowing from friends (unless of course, you don’t have to pay it back) or from your neighbours or the bank.
2. Look over your debts
This is the hard part. Take a look over all the debts that you have and really assess how much money you owe.
It’s pretty painful doing this as it requires you to stare your debt in the face and think about how you got yourself into this situation.
It’s a good healthy practice to do because only when you can own up to your problems can you then really begin to change them.
3. Start a budget
One of the fastest ways that people get themselves into debt is because they haven’t been keeping track of their income and expenditure.
Having a good solid budget will help you to look at what you have coming in monthly so that you can access and plan for your money.
This way you can prevent yourself from spiralling further into debt.
If you don’t already have a budget in place you can use my free budget template below.
4. Start with a plan
Have a plan to pay off your debt.
Note down your debts along with their interest rate charges.
The first thing you need to do is to make sure that you are paying them all off in some way even if that means meeting the minimum payment requirements.
If during the process you realise that you can’t afford to pay them all off without going further into debt then its time to pick up the phone and make some calls to some of these companies.
5. Call your creditors
What most people don’t realise is that there is no sense in a company making it difficult for you to repay your debts because that way no one wins.
Creditors want you to pay your debt off so they can get their money back.
Give your creditor a call and see if you can rejig your payments to make sure you can afford to pay them.
It might be that you will have to pay over a longer period of time.
That’s ok. I’ll tell you why.
Your plan is just to make sure you don’t give yourself overwhelming pressure to pay off the debt.
If you can agree to a minimum payment amount then you may have the freedom to pay more money elsewhere.
Hear me out.
The list that you made previously of all the debts that you owe, along with the interest rates is very handy.
What you need to do right now is to take the one with the highest interest rate and begin to make extra payments on that debt first. Overpay by however much you can comfortably afford to pay back.
Keep all your other debts on a minimum payment and continue to pay them each month.
By doing this you will cut your interest rate costs simply by having paid off the debt more quickly.
Doing this could save you thousands of dollars.
Once you have paid this debt move on to the next debt with the highest interest rate.
Rinse and repeat until all your debts are paid off and you are debt-free.
6. Have an emergency fund
An emergency fund will ensure that you stay out of debt for the most part.
Saving your first $1000 or £1000 is a good place to begin for your emergency fund.
Your emergency fund is ONLY to be used for emergencies and nothing else.
If you are not sure what an emergency fund is then you should take a look at this.
7. Make cutbacks
Find extra ways to cut down on your outgoings.
This is no time to have a pity party, you have to get serious and more disciplined with your finance.
Now you have your budget together look for areas where you can save money.
Cutting back on groceries is usually a good place to begin.
Then look at your other everyday expenses and make some cutbacks there too.
8. Look for ways to make a little extra money
Sometimes it’s necessary to get a second job to help you with your finances.
This doesn’t have to mean you have to start applying to companies for a job. No.
There are ways that you can make extra money on the side without having to send in a single application form.
Transcribing is a great to work from home and get some additional cash.
You simply work only when you have the time so it doesn’t interfere with your life too much.
Is another great way to make extra cash. The set up is pretty similar to transcribing.
You can work your own hours only when they suit and your earning potential is down to you.
No experience is necessary to start proofreading.
3. Take online surveys
Surveys will never make you rich but they will put a few extra dollars in your wallet so you can pay a few extra bills.
If you want a no pressure way to make a little extra cash, taking surveys will do that for you.
Try out Survey Junkie and see what you think. (Only available for those in the United States, Canada and Australia)
9. Pay on time
This is one area that people fail miserably at. It’s so important to make sure your bills are paid on time.
If you don’t do this the company you owe could slap you with an extra charge.
You don’t want that because it’s completely counterproductive from trying to pay off your debts.
Make sure you set yourself reminders for when your bills are due or make your payments automated to avoid extra charges being implemented.
Final thoughts on how to get out of debt when you are broke
Take each day as it comes. Your debt was not birthed overnight and it certainly won’t clear up overnight.
Make a real commitment to paying off your debts and you will eventually get there and reap the benefits of your hard work.
No more being broke and in debt!
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