Life can be pretty stressful, but it is even more difficult when you are dealing with debt. Whether you are planning to retire soon, want to save for your child’s education, or have a large purchase like a car or house in your future, being able to manage and eliminate debt entirely is crucial. Below are some common sense tips on how to dig your way out of debt. Following these suggestions will help you build good financial habits, and ensure that your time and energy are spent on more important things than struggling under a mountain of debt.
Tip 1: If you must use credit, do so strategically
In general, Credit Cards are not to be used for every day purchases, unless you know you’ll have the funds at the end of the billing cycle to pay the balance off in full. Many people with Rewards Credit Cards use these for every purchase, even as little as a few dollars, because there is a reward in doing so. This is acceptable only when you pay back what you’ve borrowed before Interest and finance charges accrue. If you cannot pay back the amount you’ve charged to your Credit Card it is a sign that you should not be using it. Instead, consider using cash or a Debit Card for daily purchases. If you need a credit card to process a transaction (for example, when shopping online, reserving a rental car or hotel room, or any other service that requires a credit deposit) consider using a secured or Prepaid Credit card. These cards with a Visa or MasterCard logo are accepted almost everywhere, and will keep you from going into debt, because balances are based on a deposit, and credit limits tend to be below $500.
Tip 2: Develop good spending habits
Many people forget that it might have taken them years to dig themselves into a hole of debt. Poor spending habits, denial, and ignorance are the primary reasons people get over their heads into debt. The good news is that, if you’re reading this you’re no longer in denial, nor can you claim ignorance. But you must change your spending habits if you want to get out, and stay out, of debt. Primarily, figure out what your over-spending triggers are. For some people, it’s online shopping late at night. For others, their first response to a stressful day is to shop their worries away. And other people are simply mindless shoppers, prone to spending money on anything that has a “sale” or “new” tag on the front. Regardless of what triggers your urge to over-spend, it’s important that you acknowledge when this happens, and replace the urge with behaviors that are not destructive. Don’t think you have the will power to keep from over-spending? Try keeping credit cards in a place you can’t easily obtain them (leaving them at home in a secure place is one fantastic idea). Or have a friend/relative help you control your spending by requiring that they approve all of your unnecessary purchases. You didn’t develop poor spending habits overnight, and you’ll only replace them with better habits one day at a time. Make every one of those opportunities for developing good spending habits count in your favor.
Tip 3: Focus on paying off your existing debt
Now that you’ve agreed to limit or stop using credit, as well as tame some poor spending habits, the next step is to work on that debt. Since bankruptcy should be a last resort, it’s recommended that you try to pay back the money you owe. It’s a great idea to list all of the secured and unsecured debt you’re carrying, and then begin paying off the accounts with the lowest balances. This strategy is known as the “Debt Snowball”, because as you pay off each smaller account, that money accumulates allowing you to pay off larger balances. Another strategy is the “Debt Avalanche” which requires you to pay off accounts with the largest interest rates first. Regardless of which approach you select, the goal is to chip away at your debt, which can only happen if you’re focused on paying it down.
Tip 4: Create a budget and pay bills on time
One of the best ways to ensure that you can focus on your existing debt is to set up a plan that gives you extra money to do so. You can be very motivated to pay off your debt, but if you don’t have the funds available, you won’t be very successful. That is why creating a budget for your household is so important. There are many great resources for creating your budget. You can do so for free using regular computer software (like Microsoft Excel), you can purchase software, and even use online budget templates. The point is that you just need to start. Once you’ve selecting the budget software/program you’ll use, make a list of all monthly bills and expenses. The first priority in your budget is paying all bills on time. Second priority is putting money aside to pay down debt. Third priority involves putting funds aside for savings. Fourth priority is money for essential items that you have some discretion over, like money for food and transportation. And fifth priority is non-essential items like gym memberships, etc. Creating a budget may be painful initially, but your stress will decrease as you begin paying off your debt.
Tip 5: Open a Savings Account
When people think about paying off debt they rarely consider saving money in the process, but this is an important step. Any financial advisor will tell you that your household should have 6 months’ worth of income saved up. For those who are starting with a lot of debt and zero savings, working your way up to that amount of savings may take as long as two or three years. The point is not how long it will take you to accumulate the funds, but rather that you should start as soon as possible. One of the best ways to give your savings a boost is to set up a High Yield savings account (signing up for an account online often provides some of the best promotions, so look there first). If you’re getting money back from taxes, have this money direct deposited into your savings, and don’t touch it. Additionally, following your budget, try to place at least 10% of your monthly earnings in savings. While you may not be able to build up savings as quickly as you’d like, having even a little money saved up for emergency situations may keep you from falling back into debt.
Tip 6: Become a “saver” rather than a “spender”
Finally, in order to become a person who is debt-free, the only way to do this is to make more money than you spend. If your current job doesn’t provide enough money, consider getting a second job, or making money selling some items around the house you don’t use. Try turning a weekend hobby into a money-making endeavor. If you grow your own produce, consider selling the extras at your local farmers market, or setting up a barter system with friends/neighbors/family to trade produce for something you need. Try to get things for less: bargain shop, use coupons, and compare prices so that you know whether a “sale” is really a good deal. Change your perception of yourself from a “spender” to a “saver”, and behave in ways that match these new expectations. All of these options, and more, will help you earn extra money in order to facilitate your primary goal: getting, and staying, out of debt!