Many people face debt at least once in their lives. If you have debt, here’s a step-by-step guide on gaining financial freedom.
Hire a Finance Professional
Hiring a finance professional is the best way to get out of debt quickly. From credit issues to tax audit help, an expert will strategize the perfect payment plan for you. The type of professional you should hire depends on your goals and the type of debt you have.
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Accountant
General accountants track the day-to-day, month-to-month, and yearly expenses that go in and out of your account. They can also prepare tax returns and strategize the best ways to pay off debt. Hire an accountant that you can check in with from time to time to monitor your progress and ask for additional help.
Certified Public Accountant
Certified public accountants, or CPAs, have advanced knowledge of financial theories, methods, and applications. All CPAs have passed a rigorous exam that proves their knowledge in a variety of finance-related matters. They’re also legally allowed to represent you before the IRS should you need to negotiate a settlement or payment plan.
Attorney
Need to take your financial issue to court? An attorney can help. Attorneys can specialize in a number of areas, including banking, finance, and taxes. Depending on your situation, you may even opt for a divorce or an estate attorney. Whatever the case, you can find an attorney who’ll negotiate a settlement or payment plan to help you achieve your goals.
Enrolled Agent
Enrolled agents specialize in tax law. Many enrolled agents begin their career working for the IRS, so they learn the ins and outs of federal taxes. Choose an enrolled agent when you’re buried under tax debt, including wage garnishments and levies.
List Your Debts
It’s time to take a good look at your financial situation. Record it in a notebook, type it up in a spreadsheet, or use another type of software to list all that you owe. There are two main ways to list your debt.
Snowball Method
In the snowball method, you list your debts from the smallest to largest dollar amount. Some people tackle small amounts first to shorten the list faster. This can inspire a feeling of accomplishment and motivate you to move forward.
Avalanche Method
The avalanche method is typically the most efficient way to pay off debt. Use this method to diminish debts with the highest interest rate first. Interest can make debt creep up over time, so small amounts can become large fast. This method may save you more money in the long run.
Determine your Net Income
Your net income is the amount you have after taxes and insurance are taken out. This is the remaining amount you have to pay for necessary expenses.
Create a Realistic Budget
You can’t spend outside your means, and you still have other priorities to spend money on. Create a reasonable budget that accommodates all of your needs. Here are four steps to creating a budget:
- Use a notebook or budgeting software. There are many types of software available, from Mint to You Need a Budget.
- Deduct all necessary expenses. This may include rent, mortgage payment, insurance, car payments, groceries, etc.
- Track your spending. Check your spending habits and adjust as needed. Cut frivolous spending.
- Set Achievable Goals. Your goals should be SMART – specific, measurable, action-oriented, realistic, and time bound.
Tackling debt is a huge undertaking, and you need to stay motivated to get it done. Give yourself a reward each time you reach a milestone. When you’re able to make a full payment on time, give yourself a treat like a movie or a fun dinner at home. When you tackle larger debts, you can begin making plans for the future.
Debt doesn’t have to ruin your life. Achieve financial freedom by following this guide!
Are you ready to get rid of debt for good?
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I did a mix of the snowball and avalanche debt pay off methods. I started with the snowball method, mainly because I had a lot of “little” debts that were still crazy interest rate wise. Once I paid those off, I was feeling a lot more confident in my situation, so I switched to paying off higher interest rates first, vs. just focusing on the money owed.
I’m also doing a combination of the snowball and avalanche. The snowball was more motivating at first, but now I really want to get rid of those high interest debts (even though those are bigger and will take longer to pay off). Congrats again on having yours paid off!