How to Live Within Your Means and Get Out of Debt

It's downright silly that people who bend over backwards to find bargains also pay hundreds or thousands of dollars in interest every year without thinking twice. If you really want to save money, pay off outstanding loans and credit card debt as quickly as possible. Some of these guidelines may sound harsh, but the price you'll pay for ignoring them is even harsher.

Instructions

Difficulty: Challenging

1. Make a monthly budget and stick to it. Housing, food, utilities, car and insurance payments have to be made. Allocate an additional amount each month to paying off your debt. Many financial planners say that this is the most effective way to manage your finances. See How to Buy Personal Finance Software.
2. Control your spending. This is the first step toward fixing money problems. Most people who spend too much are enthralled with the act of buying, not the value of the goods. Question every purchase--what will happen if you don't buy? You might be surprised how little real value most stuff has and how easily you can do without it.
3. Keep a shopping journal of what you buy each day and how much it cost. This may seem tedious, but it will track each expenditure and encourage conscious spending.
4. When you're paying off any debt, it's a great idea to know where you stand financially. Specifically, it's smart to recognize any warning signs that might foretell a personal economic plunge. For example, if you have a student loan, three unpaid invoices from your lender is a big red flag that you're not keeping up with your loan payments. Another red flag: Your bank account is consistently overdrawn.
5. Destroy all of your credit cards except one, with the lowest possible (long-term) interest rate. Leave this card at home and use it only for emergencies. Transfer the debt on your other cards to this remaining card. Carry a small amount of cash for daily expenses. See How to Negotiate a Better Credit Card Deal.
6. Refinance your mortgage at a lower rate. If your credit is already bad, this may not be possible. But if you can get a lower rate, you can apply your savings directly to pay down your debt, or pull extra cash out to take care of it at once. See How to Refinance Your Home and How to Save Big Bucks on Your Mortgage.
7. Investigate a home equity loan with which you can pay off other debts. The idea is to combine your debts into one payment, at the lowest possible interest rate. If you have substantial credit card debt, you're probably paying a very high interest rate, so other loan options are worth exploring. Approach your bank for information. See How to Obtain a Home Equity Loan.
8. Sell valuables and use the money to pay off your debt. RVs, cars, boats and other expensive toys should be eliminated. They won't be fun anyway, if they're dragging you into financial ruin.
9. Get a copy of your credit report from one of the three major credit bureaus: Equifax, Experianand TransUnion (see Resources). Review your report carefully for accounts or addresses that don't belong to you, creditors who have made mistakes, and companies who have looked at your report without your permission. Report any mistakes to the credit bureau. That means requesting and reviewing a report from the other two bureaus to make sure the mistakes are corrected.
10. Maintain contact with your creditors. Avoiding phone calls and letters from your creditors will make your problems worse. They want to work with you and it's in your interest to do so before they turn things over to a collection agency.
11. Negotiate a reduction in your annual fee. Finance charges are not the only cost of a credit card--the annual fee can add up to much more than your monthly finance charges. Call your credit card company and negotiate hard to reduce or even eliminate this fee. Again, threatening to close your account usually gets their attention. Don't bother trying this with cards that are cobranded with airlines or hotels to offer rewards--they will never drop their fee.
12. Avoid maxing out all your credit limits. If you use 80 percent or more of the credit you have available, lenders will think you are living beyond your means--and you probably are.
13. Cancel any accounts you don't use. Credit cards you acquired but never use are still considered active.
14. Apply occasional windfalls and raises to eliminate outstanding debt.

What to Look For:

• Mortgage options
• Liquidated assets
• Debt consolidation
• Lower interest rates
• Lower payoff amount

Tips & Warnings

• The Debt-Proof Living Web site provides further ideas about controlling your expenses and managing your money (see Resources).
• Pay your bills on time. Besides imposing hefty late fees, creditors bump up interest rates for late payments. Pay parking tickets and car registration swiftly to avoid late penalties.
• Call the credit company if, after the above measures, you still can't tackle your debt. Ask for a "lower payoff amount." Credit companies will often work with you in severe cases so that they can recoup some of their money.
• Never use a debt consolidator that advertises aggressively or promises you a quick fix. Often, they'll plunge you deeper into debt and may even trash your credit record.
• Don't apply for a zero-interest card unless you're absolutely committed to paying off your debt before the interest-free period ends. If you don't, you'll get stuck with a very high rate.