Debt… a constant strain on many people’s finances and often an obstacle to building personal wealth. But like most obstacles, it can be overcome. Depending on how much debt you’re in, that might take a short time or a long time. The road to debt freedom follows the same basic strategies for building wealth outlined in PWB’s Starting Guide.
To pay off debt you’ll need to work on cutting your costs (for debt specifically, that mean interest), and increasing your net income…
Here are two strategies for handling debt:
1) Debt Consolidation
If you have high interest debt (credit cards, certain loans, etc), you can consider consolidating your debt, if you are able to get a lower overall interest rate. One excellent way to do this is through peer-to-peer lending. P2P Companies like Lending Club will help you consolidate your debt by connecting you with people (not loan companies!) looking to lend to borrowers like yourself. If you have an average credit score or better (meaning it’s above 640), you may qualify to borrow through Lending Club. They offer competitive borrowing rates (~7% to ~30%), especially for borrowers with excellent credit history. If you don’t qualify, check out my post on Credit Scores and my online class on the topic, which includes ways to boost your score.
A lower interest rate with Lending Club will put you on a faster track to debt freedom, but you’ll also need to work on…
2) Wealth Building: Personal Income & Savings
To pay of your debt, you’ll ultimately have to be earning more money than you’re spending. Cutting your spending through focused high powered saving is the fastest way to start. Increasing your personal income will take longer but have a much greater effect, and should be a main focus, especially if you are in a lot of debt.
As you increase net earnings (either by cutting expense and/or boosting income), set an aggressive debt payment plan and stick to it. Automating your financing with bill payment services and constant reminders can help you accomplish that.