Getting out of debt requires discipline and determination. It also requires a plan that works. The following is a step-by-step guide on how to get out of debt when you're broke.
Step 1: Track All Expenses for One Month
Before you begin to get out of debt, you must first understand where your money is going. Track all of your expenses, including everything from your housing payment to a random candy bar purchase, for a full month. This is the most accurate way to see how much you spend on different items.
Step 2: Create a Monthly Budget
Once you have an understanding of where you spend, draft up a monthly budget. A budget is a projection of the next month's income and expenses, and it should detail every source of income and each expense you have.
You can use your expenses from the previous month as a starting point for the expense side of the budget but make adjustments where necessary. The total left over at month's end should be nothing, with income equaling expenses exactly.
Step 3: Follow the Monthly Budget
After your budget is in place, you need to follow it. This is where discipline and determination are required for your budget might limit spending in certain areas where you'd like to splurge. Stick with the budget, though, and financial rewards will begin to follow.
Step 4: Save Up a Small Emergency Fund
With a well-designed budget in place, you should be able to start making progress toward your goals. Initially, only make the minimum payments on all of your debts and save any leftover income in an emergency fund. You'll want to build up a small emergency fund as quickly as possible.
The purpose of this emergency fund is to keep emergencies from sending you further into debt. Should your glasses break or car need repairs, the emergency fund can pay for the unexpected expense. You won't need to put it on a credit card or take out a personal loan.
Step 5: Pay Extra on the Smallest Debt
As soon as your small emergency fund is in place, put every extra dollar that you can toward your debts. Specifically, use any available funds to make an extra payment on the smallest debt you have. Once it's paid off, move onto the next-smallest debt.
By paying debts off in order of smallest to largest, you'll make noticeable progress quickly. This progress will give you the emotional strength necessary to pay everything off and get out of debt. These tips will help you learn how to get out of debt when you are broke.