There is an epidemic of debt in much of the affluent world today. The chickens have come home to roost as rampant borrowing and spending is catching up with a public ill equipped to handle the debt load. The economic and personal consequences of this debt pit will be felt for years to come.
All is not lost, however. As bad as the situation may be, there is always a way to get through it. Fighting through and paying off debt requires three components: planning, action, and commitment. A debtor who buys into these three key ingredients will be more likely to pay of his or her debt with a minimum of fuss.
To that end, here is a guide for those who want to tackle and eliminate their debt. Keep in mind that this program is not a quick fix – what took years to build can’t be reversed in a day. However, it is a plan that will reliably lead to debt reduction and, eventually, the financial freedom that many crave.
Assess and Plan
Before you do anything, stop the bleeding by abstaining from more credit. Cut your credit cards and only use cash. Make sure you don’t add to your burden with needless spending.
Your first step when constructing a get out of debt plan is to assess your situation. You need to know your own financial health before you make any further decisions or changes. Gather together all the information you have about all your oustanding debts – balances, rates, etc. Obtain a free credit report from one or all of the three credit reporting agencies. Note any accounts that are past due or any late or missed payments that may be crushing your credit score.
After assessing all of what you owe, it’s time to create a budget. This budget will tell you how much you have coming in, how much you need to pay, and where the wiggle room exists so that you can streamline your own personal economy. On a piece of paper, write down all your monthly income sources, coming up with a total monthly income.
Next, determine all of your monthly expenses. Write down all your fixed expenses, like rent or mortgage payments, car payments, minimum payments on debt, utilities, etc. Budget in some money for living expenses, too. Be as detailed as possible – write down every single source of expense down to the penny. You may be surprised at what you’re spending your money on.
Hopefully, you’ll have extra money left over between your income and your expenses. If so, budget in as much as possible to paying off more debt. If you pay minimum payments every month, you’ll pay a lot of money in the long run, so the more you pay now, the better. Granted, you may want to set aside some discretionary money for entertainment and fun, but what could be more fun than being debt free? If you need help with this step, separate your expenses into ‘priorities.’ Make sure all your high priority expenses are covered before indulging in lower priority transactions.
If you’re having trouble meeting your expenses for the month, or if you want to find ways to cut your budget, think creatively. There are plenty of places where you can make slices. For example, get rid of your cable TV and replace it with online TV. Buy all your food ahead of time and build each week’s meals the Sunday. Do whatever you can do to slice 10% here, cut 5% there – it will add up. You could also consider adding to the income side of the ledger by getting a part-time job or starting an online business.
Pay It Down
Next, you have to stick to your budget and actually start making the payments. Of course, don’t stick to the budget rigidly if it doesn’t work or if you see areas where you could improve. You don’t want to stray arbitrarily, but you don’t want to be a slave to your budget either.
When paying down debts, there are two debt sources you’ll want to wipe out as quickly as possible. First, if you have any debts past due, in collections, or debts that are hurting your credit score in any way, pay those down to take the pressure off and save your credit score. Next, hit the debts that have the highest interest rates. These will cost you the most in the long term; for many people these will be credit card debts. Pay the minimum on everything else and concentrate your financial forces on these. Once they’re paid off, you’ll have more money left over to pay other debts – this is putting the principle of ‘snowballing’ into action.
Don’t be afraid to think creatively to help pay down your debt. Consider transferring balances from high-interest rate debt to lower interest rates. A home equity loan may save you a ton of money if it can wipe out your credit card debt, for example. Also consider other sources of cash that you may have – savings accounts, 401(k)s, retirement accounts, and life insurance policies. You should always read the fine print to be aware of the consequences of using this money, but it may make sense for your situation to do so. Debt settlement may also be an option for those who can credibly threaten bankruptcy, though there are no guarantees.
Persevere and Commit
The final ingredient for paying down your debt is sticking with it. Committing to your budget and plan for the months or years that you need to will be the most challenging aspect of this plan. Keep your goals in mind so that you know why you are making the sacrifices you are. And remember that you are not alone – friends, family, and debt management and credit counseling services are all available to help you out. One final note of warning: bankruptcy is absolutely a measure of last resort. It is not something to be undergone lightly. Instead, find alternatives to bankruptcy or fight the battle yourself first. Stop thinking about ways on how to live debt free. Just follow this plan and you’ll be sure to win.
