Getting out of debt might seem like a simple concept, but it can take years of hard work and dedication to be debt free. If you want to get your finances back on track, you have to come up with a realistic plan to pay down your debt, while also taking steps to combat your overspending. It is important to act fast, because serious damage can be done if you neglect your financial problems. Debt can snowball into undesired outcomes like bankruptcy or lawsuits. So, if you act quickly and follow a few of the tips below, your balance should steadily decrease month by month.
Never pay only the minimum
You can get into serious trouble by making only the minimum payments. By doing so, you are guaranteeing yourself more debt. Balance on your credit cards cost you money every single day, whether you use them or not (from the interest adding up). The rate at which you incur interest depends on the type of card you signed up for. It usually ranges from 10%-20% annually.
It may be convenient to make this small payment, but this practice wasn’t designed with your best interest in mind. The minimum payment plays to the procrastinator inside all of us and it’s there to bait you into putting off your balance for another month — hat one month, turns into two, and so on. These companies make billions of dollars every year this way.
Keeping consumers in debt to make a profit is ethically questionable, but this is why credit cards are so lucrative. So, the first step to reducing your debt, is resolve to never again make only the minimum credit card payment.
Find out your true cost of living
People enjoy living beyond their means. Having money and spending it frivolously can be a lot of fun. But squandering cash that you don’t have, when you need to make a rent payment is not a good way to live. When you supplement your income with credit cards, it can be hard to know exactly what you can or can’t afford. If you are living a rappers lifestyle on a secretary’s budget, it’s time to sit down and do some math.
Put your accounting hat on and write all of your expenses down on paper with a number 2 pencil. Make one column with your after-tax income and another column with all of your expenses. List everything including: housing, utilities, food, entertainment, travel, cell phone, etc. — don’t skip anything! See if you are generating a negative cash flow for the month. If you are, you need to decide which expenses are essential, and which ones can be cut. Be realistic with what you can afford, and be aggressive with the things you decide to cut out.
Pay your highest interest debt first
Find your most expensive debt (most likely credit card debt) and axe it. Make a list of all your debts ranked from highest to lowest interest, and tackle them one by one. Search the couch cushions, bust open your piggy bank, do whatever you have to do to find extra cash, and pay down that #1 highest interest debt first. Take a percentage of your monthly disposable income (like 10%) and drop it all down on this one particular debt. Do this every month until it dwindles, and eventually goes away.
It may seem daunting when you are facing a large balance, but if you commit to it, things will get better… It might take some time, but once you have conquered the #1 debt, you can switch to the next worst offender. Leave the mortgage and student loan debt alone for now (still make your payments, of course), because these are likely nunder 10% and you want to focus on the highest interest debt first. Plus, certain debts like mortgage debt and student loans are ok, because they can even help you create wealth in the long run if used properly. Real estate “usually” appreciates in value over time, and education can help you earn more.
Cut back and sell things to generate money
Most people aren’t really conscious about every little dime they spend month after month. But reoccurring expenses like premium cable channels, gym memberships, and expensive cell plans, can really drain your bank account dry.
When times are tough, it’s time to trim the fat. Come up with a list of expenses that you can switch to a cheaper plan, or cut out completely. If you don’t watch HBO often, cancel it. If you don’t play golf, sell your clubs. If there are things around the house that you don’t need, you can have an estate sale to generate extra funds. Use the profits of the estate sale ONLY to pay down your highest interest debt. Items just sitting around collecting dust can all be turned into cash. Something that is trash to you might fetch a few dollars that can drop your balance down another notch.
Another thing you might want to consider is a part time job. Many people might grimace at this thought, but a night job like pizza delivery is a very low stress job that pays pretty decently. I recently talked to a debt blogger who was delivering pizzas at night to help pay down his debt, and I’ve also done this when I was younger. It’s just a few extra hours, a few times a week, but it can make a world of difference if you are struggling.
Ask for a lower interest rate on your card
Your credit card company earns a lot from a high interest debtor like you, and they will not want to lose you as a customer. Dial up customer service and say you are considering doing a balance transfer to a rival’s lower interest card. You don’t really want to go through the hassle of doing this, so say you would rather just work with them. Quote them a specific interest rate off another company’s card (maybe a few % less than your current rate) and ask them if they will give you a lower rate. You can do a balance transfer to another card, and they know it, so hopefully they will play ball.
I recently read that over 50% of customers who called to ask for a lower rate, got one instantly. It may be an uncomfortable call, but getting a lower rate will be a huge help to your deflating wallet. It is possible that they might say NO, but for 3 minutes of your time, it’s very much worth it. The lower interest rate can keep you from losing the momentum you’ve got going. Your balance won’t snowball so quickly and it will become much more manageable.
The alternative to paying down your debt is not so pleasant. You can even find yourself in financial mess involving lawsuits, income garnishment, or even a lien on your home. That is a road you want to avoid going down at all costs. It may seem tough at times, but there is a way out. You need to embrace this new debt free lifestyle. It is much more stress free, and totally liberating if you accept it. You might not have as many material possessions, but living without debt will make you feel like a giant weight is off your shoulders.