Get Out of Debt, a Starting Point

Debt is in every household.  Too much debt can be paralyzing and you may be in over your head and not even fully realize it.  If you suspect that you’re carrying too much debt in the form of credit cards, mortgages, car loans and other debt instruments, you need to determine your exact position and then, most likely, begin working to free yourself from the weight of the financial burden.

Too Much Debt

It’s expected, and actually a good thing, to have some debt.  Your mortgage, for example, is one of your largest tax advantages.  But there are few, if any, perks to having a balance on credit cards or other loans.  But despite this Americans continue to spend using credit cards.  The average American now has over $9,000 in credit card debt and that number’s not getting any lower.

Acceptable debt levels vary by the individual, but a good rule of thumb is looking at percentages.  If 20% or more of your take home pay is going to debt that is not of the mortgage variety, you’re looking at too much.  Likewise, if more than 30% of your gross income is tied up in your home, you are most likely becoming or already are overextended.

It may be that your numbers are fine, but you still feel finances are tight.  If you struggle to make the minimum payments on your debts or can’t even list what you owe on what loan, you’re looking at too much, and it’s time to make a change.  Many people who have too much debt don’t think about it.  They get their bills in the mail and make the minimum payments or even end up paying late fees on a regular basis without much thought of paying off the whole balance.  This is how individuals go deeper into debt and incur more stress. 

Making a clear decision to get involved in debt elimination and finding out how to create a plan will actually get people into a position of less debt, better cash flow and less stress.  The process will certainly help your credit, credit report and credit scores along the way.  Making a plan to get out of debt is the starting point.
Budget

The first step in resolving your debt is to budget correctly each month and monitor the money you have.  First, you need to determine what your monthly income or earnings are and what your expenses are.  For an entire month, keep track of all spending.  Where is your money going?  Write down your bills and keep receipts from credit card transactions.  Then, at the end of the month, you can collect your items in a single list and tally up the total.  If this number is higher than your income, you know you’ve got some work to do.

Write down the names of the different accounts that you have to make payments on, the order they need to be paid, and how much money you need to eliminate that debt.  Divide those transactions into essential ones and nonessential.  Bills are essential, but some bills such as cable or cell phones may not be.  It’s a personal decision.  Nonessential items are things such as eating out, entertainment and travel (unless its part of your career.)  As you make your budget, you will be able to identify what your spending habits are.  The next logical step is to items to remove the nonessential ones.  Cut back on eating out and stick to the free coffee in your employer’s break room.  Take the bus rather than trying to park downtown and cancel all the premium packages on the cable you never watch anyway.  The key here is to eliminate or at least reduce expenses that are lowest in priority.  Trim the fat from your spending and design a budget that is reasonable, yet tight.

Paying Down Debt

Once you have your spending under control, stop spending on your credit cards if possible.  If you must charge things, use a debit card so that the money comes directly from your bank account or open a new account with a low limit to generate a balance that you will now be paying off monthly.  Then tackle the old debt.

The plan for getting the old debt paid off is to focus on one debt at a time.  You still make regular payments on all of the debts that you can, but only focus on paying off one at a time.  Pay off the loan with the highest rate of interest first.  The higher the interest rate on a credit card, the more you pay over time.  Pay the minimum on every card except your target.  Throw as much as you can toward that card until you have it paid off.   In the beginning, cut back on expenses as much as possible to get the first debt paid off.  Once the first debt or credit card is paid off, you take the money that you had been applying to that debt and apply it to the next debt that you want to pay off.   Then move on to the next card – this one should have the next highest interest rate.  Finally, you’ll have all of your debt resolved and you’ll be free to move forward.

The creation of a budget is always a good project so you on work on a path to successful debt management and elimination and then stay on a plan to live a better lifestyle without the need for excess debt.

Using Credit Wisely

Now that you’ve gone through the trouble of paying off your debt, you must work to eliminate the possibly that you’ll end up in the same situation again.  Save for anticipated and unanticipated expenses to keep from using your credit cards in emergencies.  Find credit cards with a low interest rate should you wind up with a small balance for a month or two.  If you do find yourself using your credit card, be as frugal as possible and use it only for items that are long term investments, not incidentals such as travel or meals out.