No one likes to be in debt, but living in our debtor’s society has
made it nearly inevitable. Some debt can’t be avoided, such as a student
loan for a college education or a mortgage for a house. Then there are
necessary debts accrued due to medical emergencies, car repairs, living
expenses when income is low, and the like. However, some debts are
frivolous, such as buying a big screen TV on credit or various impulse
purchases. Regardless of the type of debt, the burden of owing your
yet-to-be-earned income to a financial lender can be overwhelming. The
stress affects every aspect of your life, and the only true way to
relieve this burden is to actually pay off the debt.
First you need to compile all of your debts. Get your latest
statements from your credit card bills, car loan, and any personal loans
(including rent-to-own items or medical bills that are on an
interest-accruing payment plan). Add up the total of all of the balances
together. This is often a painful task, but accepting the truth is the
first step to gaining control over your finances.
You need to find out the interest rate on each and every bill you are
paying. If you cannot find it on your account statement, you may need
to call the creditor to get the exact percentage. Make a list where you
write out each billing company, the total balance owed, and the interest
rate. Then organize the list from the highest interest rate to the
lowest interest rate. This is now your plan of attack. You will pay the
minimums on the other bills while you pay the most you have available
towards the highest interest debt. Once that one is paid off, then you
will do the same with the next one on the list, until you have
successfully paid off every debt on that list.
You may also want to calculate student loans and your mortgage into
the equation, but since these loans are often at the lowest interest
rate they are not priority to pay off first. And let’s also remember
that these types of loans are investments in your future, not just debt.
An education is supposed to help you gain employment and a house gives
you the security of having your own place in this world, hence why you
should mentally categorize these debts as investments more so than
burdens. However, many find these debts to be burdens, so once the
highest interest debts are paid off, continue these debt relief steps
with your student loans and then mortgage.
Interest rates themselves can make getting out of debt substantially
harder. When the majority of your minimum payment goes towards interest
instead of the principal, it takes that much more money to pay off the
entire debt. There are numerous credit card companies that offer
promotional 0% interest balance transfers. When done wisely, making a
balance transfer can help you get out of debt more quickly. But be sure
to read the fine print carefully.
A balance transfer is when you open up a new credit card and you move
the balance (the debt owed) from a credit card you already have to the
new account. The best type of balance transfer is one that offers 0%
interest for at least one year. This allows you one year to not gain
interest on the debt within the account, meaning each monthly payment
goes completely to the actual balance instead of primarily to interest.
The ideal goal is to pay off the debt in full by the end of the year
before the standard APR (annual percentage rate, also known as interest)
begins. Keep in mind that there are fees to initiate a balance
transfer. Usually the fee is 3% with a minimum of $10 and a maximum (or
cap) of $75. If you will be doing a balance transfer of more than $2,500
you need to definitely make sure there is a $75 cap, otherwise you will
be paying 3% on the full amount. The balance transfer fee is well worth
it in the long run, since it’s comparable to the interest paid each
month on a credit card balance; one month of interest fees compared to
twelve is a significant difference. But most importantly, do your best
to pay off the entire balance by the end of the promotional term of 0%
interest, so as to avoid large interest charges later.
In order to control your finances, you do need to monitor your
spending as well as your income. You need to find ways to cut back your
expenses (give up cable TV, buy new clothes less often, eat at home
more, etc.) so you can then put that money towards the debt to pay it
off faster. This is usually referred to as making a budget. Just be
careful to be realistic in your budgeting plan. Track every single time
you spend money for an entire month. Do everything as normal, just make a
note of it. At the end of the month calculate what you actually spend.
You will most likely see that you spend much more than you thought.
Never plan a budget with hypothetical or assumed numbers; you will just
be setting yourself up for failure since they will be lower than the
truth. Be honest with yourself about your money habits and plan to
develop better financial habits based on the facts.
And remember, budgeting is like dieting. If you restrict yourself too
much you will end up binging and falling off track. You can tighten
your financial belt without cutting off your circulation. Cut back in
the easier-to-sacrifice areas first (this varies per person, but for
example, it may be getting rid of the movie rental or magazine
subscriptions because you never have time for it anyway). Then each
month make another cut back (for example, cutting back eating out every
day for lunch to doing so only once or twice a week). Each time you make
a cut back, take that exact amount of money and put it towards the
highest interest bill. It’s better to ease into budgeting since you will
learn new habits instead of just temporarily being financially careful.
Before you know it, you’ll hardly notice the cut backs and you’ll be
rapidly getting yourself out of debt.