How Do I Get Out Of Debt?
It’s a question we’ve all asked ourselves; anyone who’s ever owned a credit card, taken out a student loan, financed a car, or paid a mortgage has accumulated debt. Debt can feel overwhelming, but you don’t have to be a slave to it. You just need a little common sense and some budgeting savvy. Remember, you own the debt – not the other way around.
If you follow three budgeting rules, you can be debt-free twice as fast than if you carry on using traditional guidelines (like the minimum payment) and spending habits (like reasoning, “I can’t afford this now, so I’ll charge it”). Just because the rules are simple, it doesn’t mean that they’re always easy to follow. Some will take very little effort; others may be more difficult at first. But once you create a healthy financial habit and witness the results, you’ll never regret it.
Step 1. Cut spending.
If you’re not sure where to start, try to track your spending for one week. Even one day’s tracking can be helpful. Notice where you’re letting your money go, apart from your bills, mortgage and car payments, and groceries. Maybe you buy a cup of coffee or a bottle of water every morning on your way to work. Perhaps you order pizza every Thursday for the kids. Watch where your money goes, and see where you can make some cuts.
Budgeting is not about total deprivation; it’s about being sensible. Treat yourself to a latte or a doughnut only on Fridays. Order pizza once a month instead of once a week. If you tailor your spending even the slightest bit, you will save money that can go directly towards debt removal.
Step 2. Pay off your credit cards.
Commit to making a fixed monthly payment at least a little above the minimum (5%-10% is best, if you can swing it). Make that payment every month, even as your minimum payment goes down. You’ll pay off your card in record time, and after it’s paid off, you can use that monthly contribution towards other debt, or put it into a savings account.
This really works. Check out the calculator on bankrate.com at www.bankrate.com/brm/calc/MinPayment.asp to find how making a fixed monthly payment to your credit card can save you thousands of dollars in interest and knock several years off of your debt.
Step 3. Never put more money on your credit card than you can afford to pay off each month.
Think of it as the “golden rule” of getting out of debt. As much as it pains you to put off buying that sleek new iPod or leather sofa or cashmere twin set, you must only charge what you can afford to pay off completely. Treat credit card purchases like cash. That way, you can organize and simplify your spending without paying the back-breaking interest on purchases you can’t really afford.
Remembering and sticking to these three steps will put you on the fast track to getting out of debt. The key is not to abandon these good habits. It’s tempting, especially during the holidays, or special occasions—sometimes even after you’ve managed to save some money—to break one of the rules. But even leaving $50 on your credit card from last month can lead to a financial train wreck. If you can only make your committed payment the next month, you’ll begin to fall behind again, and the credit card companies will charge you interest on all the money that carries over each month.
The next time you ask yourself “How do I get out of debt?” remember: Cut spending. Make fixed payments. Don’t over-charge. You’ll be amazed at how much faster your debt recedes, and how much money you can save. It’s an easy, sensible start to a process that could take over 30 years if you don’t make a commitment to those three rules. Wouldn’t it be better to enjoy life debt-free?
Don’t stop there.You can do more than get out of debt. You can start saving towards your future. Every week, two weeks, or month—whenever you get a paycheck, pay yourself first. Before bills, before groceries, and especially before entertainment, you must put a percentage of your paycheck into a savings account. And don’t dip into it! You won’t accumulate savings unless you leave it alone. If your company offers a 401(k) option, take it. You won’t even miss the 5% or 6% that’s already come off the top of your paycheck. If you don’t have that option, consider putting the savings into a CD at your bank. If you pay yourself first, you will save money that will be useful for financial emergencies, and also as a nest egg for investment later on.
© 2008 AmericanCreditFoundation.org®. Michael G. Peterson is a co-founder and Spokesman of American Credit Foundation, an IRS 501 (c)(3) non-profit consumer credit counseling organization that has assisted thousands of individuals and families with their financial situations through seminars, education, counseling services, and, debt management plans. For more information, and free consumer resources visit www.americancreditfoundation.org
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