How to Tackle your Debt in 5 Easy Steps
Debt has become a way of life in the United States. In 2010, Americans carried about $2.4 trillion in consumer debt, about a third of which was made up of revolving debt such as credit cards and lines of credit, according to Money-Zine.com. However, heavy reliance on credit can cause financial disaster in the form of high debt payments, interest, late fees and bankruptcy. Every dollar you spend on debt-related interest and fees is one less dollar available for creating the lifestyle you want. Five simple steps can help you dig out of debt, so you can spend your earnings on yourself instead of your creditors.
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Instructions
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Assemble your credit card, installment loan, line of credit and mortgage statements and add up how much you really owe. Many Americans, particularly those who carry several credit cards or lines of credit, are not aware of the total dollar amount of their debt. Calculating your total debt will give you a clear picture of how much you need to pay off to become financially free.
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Assess your income and non-debt expenses. Write down how much you bring in from all sources of income, an how much you need for things like groceries, gas, utilities, child care and entertainment. Subtract your non-debt expenses from your total income to determine how much you have available to pay down your debt.
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Use a spreadsheet to sort your debts in descending order of interest rate. After you have deducted your non-debt expenses from your income, subtract the minimum payments for each debt item. Apply the remainder to the debt with the highest interest rate each month until it is paid off. Then start applying the extra funds to the debt with the next-highest interest rate.
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Evaluate your non-debt expenses to determine ways to save money. You can apply any savings to your debt to become financially free more quickly. For example, save on utility bills by lowering your thermostat in winter and keeping it higher in the summer, and by turning off lights when you leave a room. Save on entertainment by buying popcorn at the grocery and renting a movie instead of taking the family to a movie theater.
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Brainstorm extra income ideas to help you reduce your debt more quickly. Taking a part-time or seasonal job, freelancing, selling items through online auctions, consulting and handling yard and household tasks for people in your neighborhood can all help provide extra income that you can apply to your debt.
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Tips & Warnings
Cut up all but one of your credit cards to eliminate the temptation of charging purchases. If you have bank debit cards, you may choose to use them exclusively, eliminating the need to carry credit cards at all.
Decide on a reward, such as a weekend getaway, that you will enjoy once you have eliminated your debt. Find and print a picture representing the reward and hang it on the refrigerator. Having a reward to look forward to can help keep you motivated and disciplined to tackle your debt.
Avoid ignoring creditor calls if you are behind on your payments. Ignoring debt can lead to late fees, default and lawsuits. In the case of secured debt, it can also lead to repossession or foreclosure.
References
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