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How To Become Debt Free

If you’re facing a lot of debt, then the first step to resolving the problem is to sit down, look through all of the relevant information and look at the facts as they are. You need to know exactly how much you owe in principal, what your interest payments will be and the total amount of monthly payments you’re looking at.

A lot of people trying to deal with their debts are unaware of how much of their money is going to interest payments. Many just don't want to know about this; and it's understandable, since this can be a bit disheartening to find out.

However, you do need to know all of the facts; there is no way to get back into good financial standing without having all of the facts in front of you. For example, if interest charges are costing you $200 per month and your monthly income is $4,000, you're spending 5% of your income on interest charges! That may not sound like much at first, but it really is a lot of money you’d be better off not paying.

If your interest payments grow to be as much as you can afford in monthly payments, this means that you'll never be able to get out from under your debts. When almost your entire payment is going towards the principal, it will take the rest of your life to repay the debt! Where you want your money going is towards the principal, not the interest.

Let's say that you have a loan which you're repaying where your payments break down to 90% interest and 10% principal. Outlandish, you say? This is actually how most home loans work in the first few years. Just use an online calculator and find out how long it would take to pay off your debt this way.

If you have a $10,000 loan to repay at 7% interest and can pay only $116 monthly, it takes 10 years to repay the loan; this means that your interest payments over the life of the loan come to $3,933, which is about 40% of the original amount of the loan!

What you need to do to get out of this and repay your debts is to do two things. The first us to come up with a budget which lets you make ends meet while making the largest payments you can each month to repay quickly and spend less on paying interest. Many find the "snowball" method to be effective. You repay the smallest debt first and work your way up until the largest debt has been repaid.

You can also start with the largest bill, since this will end up saving you the most money on interest payments. However, the progress is slower when working this way and many become discouraged – paying off the smallest loan first often serves as a motivator to keep going.

Secondly, stop incurring more debt! None – there's no use trying to get out of a hole while simultaneously digging it deeper. Try not to use your credit cards any more than absolutely necessary and you'll get yourself out of debt quicker.

You need to look at reality and commit to financial responsibility and to becoming debt-free. It's not easy, but it's absolutely necessary to getting your credit back into good standing.