You start off purchasing a few items on a credit card, and then a few more until a small amount of debt grows into a gigantic hole from which you think you’ll never be able to escape.
The best way to pay off debt is to break it down into into seven baby steps, according to financial expert Dave Ramsey, host of ‘The Dave Ramsey Show.’
Not only do these steps help you pay off debt, there are also good ideas for building wealth so you don’t got back into debt.
Regardless of how much debt you have, start a ?1,000 emergency fund. Use it for true emergencies to avoid stacking up more debt. Don’t use it to purchase unnecessary items like a new TV.
After the emergency fund is in place, Ramsey advocates paying off debt via the “debt snowball method.” Using this tactic, you start by paying off the smallest amount of debt, regardless of the interest rate. Then move on to the second-largest debt source.
This tactic is a bit controversial among financial experts, many of whom advocate paying off the debt source with the highest interest rate first, regardless of how much you owe. Pick whichever method works best for your needs.
Now that your debt is gone, start focusing on building up a long term emergency fund. It should cover 3-6 months of your living expenses. This fund should keep you from going into debt again, even if you end up unemployed for a few months or have a medical emergency.
Once your debt is gone and you have a long-term emergency fund in place, start setting aside 15 percent of your income for retirement. Pick a tax-advantaged retirement plan, and start making regular contributions. You’ll thank yourself later.
The cost of higher education isn’t getting cheaper anytime soon. Don’t just save for your future, help plan for your children’s future. Start saving for their university education.
Ramsey is a big advocate of paying off mortgages early. Why wait 30 years and have to pay all that extra interest when you can start funneling money towards paying it off early? Once you pay it off, you will finally become debt-free.
You’ve reached the end of a long journey. You are saving your money, planning your retirement, and are completely debt-free. Now is the time to start building your wealth by making smart investments. Ramsey also encourages people to give to charities and help those in need.
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