This is the exact question I asked myself when I decided to start my journey to financial freedom, how do I pay off debt when I dont have any extra money? It can seem like an impossible task when you are just struggling to meet the minimum repayments. How exactly do you start to pay off debt when you don’t have any money?! If this describes your situation then please read on and follow the initial steps outlined below. I know it can seem like an impossible task but these were my first steps to get myself in a position to start paying down my debt even though I initially thought I didn’t have any money to do so.
Tips to Pay Off Debt When You Have No Extra Money
Stop using credit cards!
This one may sound incredibly obvious but it’s incredible how many people will continue to use there cards even when they are trying to get out of debt. I’ve been guilty of this myself in the past. As difficult as it may be before you can seriously start to pay off debt you need to stop using your credit cards for purchases. Regardless of what the purchase is, even if it’s fuel for your car, you need to find a way to stop the rot otherwise you will never end the debt cycle.
Write Down All Your Debts and How Much is Owed on Each
Open an Excel sheet or Google docs sheet and write down each of your individual debts (credit cards, store cards, car loan etc) and how much is owned next to each debt. Make sure this number is accurate to the penny and write down the total. This is your number and what you need to focus all your efforts on reducing to zero.
People tend bury their head in the sand when it comes to debt, but if you are serious about getting out of it then you MUST know the exact number you are working with. Once you see the severity of the situation it becomes clear that you can no longer hide and the only way to make positive change in your life is to do what it takes to start reducing that number.
Switch Credit Card Debt to a 0% Balance Transfer Card
If you have current credit card debt on one or more cards that is charging you interest each month then you need to look at the best balance transfer cards available to you and switch all or as much debt as you can to a 0% interest balance transfer card. This can give you some much needed breathing space, stop expensive interest charges mounting up each month and really speed up the task of paying down your debt.
Ideally you want to switch to a card with a low or no switch fee and one which has the longest 0% interest free period (a number of cards now offer an impressive 30 months or more interest free on balance transfers!)
Create a Monthly Budget
Another Excel or Google doc based task here. A monthly budget is essential for those serious about sorting out their finances and particularly for those who are looking to get out of debt. Look at all your regular monthly expenses (mortgage, debt payments, subscriptions, gym membership, food and any other outgoings on a monthly basis) and write down each of these individually and the cost alongside them.
Then look at you irregular spending over the last few months and work out a monthly average cost over say 3 months or so. This could be things like eating out, going to the cinema, coffee… essentially every other item you have spent money on aside from the regular monthly expenses mentioned previously.
Next enter all of your monthly income and subtract the expenses from your income. The first time you do this there is every chance you will discover a negative balance. If that is the case then it’s clear that living beyond your means is likely a big factor in you being in debt. The next step is to go through these expenses and be ruthless about what you can cut out. Anything you can live without needs to go. Spending £100+ on cable tv? Yep bye bye. Gym membership you hardly use? That needs to go too (you don’t need a gym to keep fit!).
Do what you can to seriously reduce your spending here. At a minimum you should be spending less than you earn. However what you really need to do is reduce your expenses to a point where you have some surplus funds you can throw at reducing your debt.
Use the Debt Snowball Method
There are a number of methods you can learn about online for reducing debt but so far I have found the debt snowball method (made popular by well known personal finance expert Dave Ramsey) to be the most effective.
In a nutshell with this method you list your debts from smallest to largest, completely ignoring which has the largest interest rate (although hopefully if you have switched your balance to a 0% credit card you wont have any interest) and you attack that smallest debt with every spare penny you can throw at it. While at the same time making sure to keep up your minimum payments on your other debts. Once you have paid off the smallest debt you take what was the minimum payment for that debt PLUS what ever extra amount you were paying towards it and start throwing that at the next debt on the list and so on until you have cleared your debt.
One of the main reasons the snowball method has proven to be so effective is down to behaviour modification. Once you pay off that smallest debt you have a small sense of achievement which really helps to keep you motivated and start attacking the rest of your debt. You can read more about the debt snowball method here. I would also highly recommend reading Dave Ramsey’s Total Money Makeover. I read this last month and it really boosted my motivation to start paying off my debt. As well as lots of useful advice it has a ton of success stories from real people who were in a much bigger hole than I am and yet they managed to get out of debt completely within just a few years and in some instances less
There’s No Time Like The Present
The sooner you start acknowledging your debt and getting a plan in place to pay it off the better. Even if you follow the steps above and only manage to free up a few pounds extra to start paying off your debt it’s better to make a start than continue to ignore it. Believe me it isn’t going away and no one is gong to help if you cant help yourself. If you are struggling to even repay the minimums on your debts and feel you are in serious financial trouble then please seek free professional help. Let me know in the comments below if you decide to follow the steps above and how you get on.