How To Get Out of Debt?
The first step after you admitted that you have a problem is that you want to get out of debt. I found that many people don’t really want to take the sacrifices and discipline to really get out of debt.
1. Keep track of all expenditures.
Take a good look at your expenses over the last few months. If you never before kept a track of your expenses, then you’re like most people, you spend money on things that you really don’t need. Or, you don’t really manage the money you have; you just spend as expenses come up. But don’t feel bad about this, most of us all done that. It takes a little more time to develop a management attitude about your spending habits, but it’s essential that you take control of your spending.
Check to see that what you are spending every month are necessary expenses? Like food, housing, utilities, and payments to your creditors. Can any of your expenses be eliminated? Some examples of unnecessary expenses are: magazine subscriptions, cable television, cell phones, health club membership, and entertainment expenses. Be honest with yourself.
-Some ideas how you can save few hundred dollars a month:
-Avoid “dry clean only” clothes – saves $30/month.
-Dispense with Friday night takeout- Save $40/month
-Avoid pop…only two a day – Save up to $40/month
-Nix those Tim Horton’s/ Starbucks coffee breaks. Save $35/month
-Brow-bag lunch – Save $140/month
-Clip grocery coupons, by sale items in bulk, eschew prepared foods. Family of four – Saves $140/month
-Borrow videos ad books from the library- Save $30/month
After you’ve done this exercise for one month, sit down with your family members and try to prepare a rough spending plan for the future. Allow for items like gifts and put a dollar limit on what you will spend for each category.
The main purpose to have a spending plan is this: it gives you control of your own money. You actively decide what will be spent, and where your money can best be put to good use. There’s nothing quite as good as feeling that YOU are in control of your money rather that your expenses controlling you.
Along with controlling your money comes the matter of priorities. And with setting priorities comes one though rule of life: you can’t have everything. You have to make conscious decisions about your purchases.
An important part of the spending plan is to separate “wants” from “needs”. If you want to achieve financial independence, you may have to make sacrifices for a period of time. It’s not that tough, but it is very, very important to your financial health.
If even after you analyze your finances and you just can’t seem to set aside enough each month to pay down your debt, consider taking a part-time job to get the extra income for a period of time until you pay of your debt.
2. Pay your bills on time and try to pay more than the minimum due.
Not only will you avoid late fees and high interest rates, but paying on time is the most important factor in determining your credit scores, which determine the availability and cost of future credit. This is really, really important to pay at least the minimum in time. We learned this hard way. My hubby had some contracts where the builder hasn’t paid only after 90 days. So paying the employees and all the business related expenses we missed the credit card payments for 2 months and then when the money came in we paid a lump sum. Yes but on my credit it showed late payment for 60 days and that cracks your credit score. We lacked this important info and paid a high price for this mistake.
Optimally, pay off all charges every month. If you can’t do that, try to pay off your bills as quickly as possible. The longer you take to pay down the balance, the more money you pay in interest. Paying the minimum could mean taking 10 years or more to pay off your balance.
Take a look at this example: If you have a $3,000 balance at 19.8% interest……and you pay a minimum balance of 2% of the balance or $15.00, whichever is greater…and you make NO new purchases……It will take 39 YEARS to pay off the loan! And you will pay more than 10,000 in interest charges!
3. Negotiate with your creditors.
There is a way to negotiate with your creditors and you should do that. In most cases they will work out something to match your request. If you receive a late fee and have a good payment history, ask the credit issuer to waive the fee. If your interest rate seems high, ask them to match or beat the rate. If they won’t work with you, it may be time to look for a better credit card deal.
4. Transfer balances to lower interest cards or consolidate your high interest credit cards.
But, beware of low introductory transfer rates—they may skyrocket if not paid off over a short term. Read more in deep about debt consolidation and balance transfer in the post called Debt Consolidation vs. Debt Elimination.
5. Have a strategy to eliminate your credit cards.
There is a myth in our mind that when we pay out debt we have to start with the highest interest rate first to get out of debt quickly. But, that’s not the case.
You should pay off the smallest debt first to create a momentum in your debt elimination progress. Interest rate is an important factor but is not the most important factor. The principle is to stop everything except minimum payments and focus on the smallest debt first. List all your debts with the smallest payoff or balance first. Do not be concerned about the interest rate unless two debts have similar payouts. Paying the little debts off first gives you quick feedback, and you are more likely to stay with the plan.
Let’s say you have 3 credit cards: (these are for illustration purpose only)
Visa Balance 2,445 interest rate 28% monthly payment 75.00 interest 58.40
Visa2 Balance 7,690 interest rate 18.30% monthly payment 158.00 interest 118.22
Visa3 Balance interest rate 19.90% monthly payment 25.00 interest 9.35
In this case scenario our logic would say to start paying off first the Visa balance as that has the highest interest. After you analyze your finances and you seem to be able set aside extra $50.00 each month to pay down your debt it’s important to put that money to work for your best.
So you should add that $50.00 to the smallest balance which is Visa3, monthly payment is 25.00 now you add $50.00 so you will pay 75.00 and only about $10.00 is interest so the extra money you pay into debt elimination goes to your principal. You pay interest on your outstanding balance. The focus is to pay as much as possible into your principal to reduce your balance. Trust me it works much better.
P.S. If you need a personalized debt elimination plan you are welcome to contact me.
6. Check the fine print.
What are the late fees and over-the-limit fees? What is the grace period? Is the interest rate variable or fixed? Most credit cards have a variable interest rate, which means your debt will go up if interest rate goes up. Most importantly, read the slips that come with your bills. Issuers can usually change the terms with a 15-day notice.
7. Read your bills thoroughly each month.
Watch out for overcharges, phony charges or billing mistakes. You have 60 days to dispute these items, but after that, you’re out of luck. We been charged few times with purchases not made by us. I never before thought that could happen, since then I carefully read each statement.
8. Close zero balance accounts.
If you have accounts you don’t use, close them. This will improve your credit score. Most people don’t need more than 2-3 cards, and extra cards can only help you dig deeper into debt.
Once you close a card it’s really important that you notify the credit-card company to mark the account “closed at customer’s request.” “Otherwise, on your credit report, it will look like the creditor closed your account,” says David Mooney, PR director of Equifax, one of the biggest credit reporting agencies. Thus making you look like an even worse risk, even when you’re doing your best not to be.
9. Beware of the extras.
Credit Insurance may be more expensive than life or disability insurance, and benefits the lender as well as the cardholder. Most people won’t need it. Debt suspension and credit protection programs offer no value to consumers.
10. Stop using your credit cards immediately.
Take them out of your wallet and put them out of reach. Pay cash for everything, if you don’t have the cash you don’t needed it’s a “want” not a “need” so drop it. Put that card on ice! Here’s an idea that seem a little extreme, but it works for some people who use their cards compulsively. Keep an emergency credit card in a block of ice and put the freeze on unnecessary spending! If you have to thaw out your card before you can use it, you’ve got time to think twice before making a purchase.
Make a decision before buying anything you “want” that you go home and think about it for 24h. Don’t spend on impulse, don’t spend emotionally.
To help you manage credit, check your credit reports every year. The interest rates and offers you receive are based on your credit scores and reports. If erroneous material is on your report, it could cause your cardholders to raise your interest rates, even if your cards are in good standing.
For a FREE counseling session on how to manage your credit wisely you can contact me.
Related posts:
- Holiday Spending – without Holiday Debt.
- What is Debt Consolidation?
- Debt Elimination
- Debt Consolidation vs. Debt Elimination
- Getting Your Finances in Order Before the Holidays
- Pay Your Credit Card Balance in Full
- Manage Debt Before It Manages You!
Great article. When it comes to debt elimination many people don’t realize that you can negotiate with the creditors. It would ne great if you would provide more information about how to negotiate with creditors in ways to have positive results.
Thank you for sharing this informative article.
Looking forward to see more on the above mentioned issue.
Hey, this is my first visit to your blog… We are a group of volunteers and starting a new initiative in a community in the same niche. Your blog provided us valuable information to work on. good job
Ryan,
Come back and if you like what you read you can subscribe to RRS to receive the new post updates. You can even link back to my site if you want to share something related to my posts. Hope to hear back from you.