Debt is a common problem haunting millions of people these days. In a better economy, the effects wouldn't be as obvious as they have become since 2008. Cars are being repossessed by the dozens, dozens of foreclosures can be found inmost cities and more people than ever before are considering bankruptcy. However, all of these things can usually be prevented if you get serious about managing and cleaning up your debt.
Financial expert, New York Times best seller and talk radio host Dave Ramsey is encouraging everyone to get their act together and get rid of debt in an effort to make everyones lives better. If you don't have a $300 car payment each month, that's $300 more dollars that you could be spending on things like tourism and buying domestically made products which will help the economy. It's really not difficult to make a plan, the difficulty lies in maintaining your enthusiasm and dedication towards living on less than you earn so that you can become debt free. Here are the steps you need to take to get your debt under control.
1. Make A List of Your Debts
For some people this will be simple and can be done in minutes. Others might need to dig into their credit report to find out who they still owe. As you list your debts, you have two choices on how to list them. The obvious way is to list them in order of interest rate and aim to pay off the debt with the higher interest rate first as you'll save money in the long term. The way that Dave Ramsey's debt snowball suggests is to list them from smallest to largest and attack the smallest one first. This way you'll meet success sooner and be more motivated to keep going. Opponents of this idea say that you'll pay more in interest, this is true but that amount is negligible, often only in the hundreds of dollars, if you are pumped up and putting all your extra money toward debt.
2. Make A Budget
Once you know where you need to send your money, you need to find out where you are also spending the rest of your money. To be effective, your budget needs to zero out. You can't print more money like congress does and keep spending more than you make. If you are overspending figure out why. Maybe you are eating out too much which could be solved by prepping meals on the weekends so that it only takes minutes to get dinner on the table in the evenings. Perhaps you are going out to movies, clubs and restaurants with friends most nights of the week. Try declining their invitations at least once a week or offer that they all hang out at your place.
3. Build Up An Emergency Fund
Many people have great intentions when it comes to paying off debt, but they get sidetracked by emergencies that creep up; the car tire blows out, a window gets broken or Bobby breaks his arm. Help defend yourself from having to change directions financially, by getting a 1000 emergency fund together. Keep it in a separate savings account so that it's liquid but not so easily available to get to. Once you've started your debt repayment plan, don't use this money for anything except true emergencies. If you do need to tap into it, build it back up by placing your extra money in it, and not paying extra on your debts, until it's back to it's original amount.
4. Prepare a Debt Snowball
Now that you know what you owe and how much money is available, take your list of debts and get started on your debt snowball. Whichever way you have chosen, smallest to largest or highest interest rate to lowest interest rate, stick with your plan and get going. What you need to do now is to pay your regular minimum monthly payments on each one, except the one that's at the top. Pay as much extra on that one as you can. Do this each month until it's payed off. Then take that payment and put it, plus surplus money, onto your next debt. This is where you start to gain traction. For example, say you have three $2000 debts that each have minimum payments of $100. Each month you can come up with $800 to use to pay off debt. For the sake of simplicity in this illustration, we'll not consider interest.
The first month, you make your usual three payments and then use the other $500 to pay down debt #1. Now you only owe $400 on it. It will be gone in the second month. You pay your usual three payments, and have just $300 to pay on it. Take the other $200 to debt #2, which is now only $800, and make it $600. In the third month you pay your two payments, and after applying your extra $500, debt #2 is gone. Debt three is now at only $700 and in the fourth month, with $800 to devote towards it, you wipe it out with a hundred bucks to spare!
While your numbers will be different, this is the basic principle of the debt snowball and how it works. You'll want to track your progress on a spreadsheet, in a note book or with some budgeting software. Use what works best for you so that you can keep on track.
5. Up Your Income
While there's a lot to be said for frugality, and it can save you lots of money, earning more money is also important. You might cut your expenses back to almost nothing and sell your entire DVD collection, but what do you do when you can't cut costs anymore? Get a part time job! You can go the pizza or paper delivery route or start your own little side business like babysitting, walking dogs or cleaning houses. Choose a job that you will enjoy, at least on some level, so that you stick with it for as long as you are in debt and really need the extra money. Then try to get as many hours as your normal work schedule will allow so that you can supplement your normal income and pay down your debt even faster. When you're out of debt you can quit the job or keep at it for awhile longer to build up a larger emergency fund and get into a better financial position.
There you have it, five steps to managing your debt and getting out of it. Do all you can to keep focused on the end goal, financial freedom, so that you can gain the most momentum and get out of debt quickly. Good luck!