Are You in Debt?

If you have already amassed a fair amount of debt you may think you can’t get out from under it, but you can. It will not be easy and it will take some time but you can do it. You need to develop a plan and stick to it to see progress, but once you start to see progress you will see that you can get out of debt and stay out of debt once and for all. Make debt consolidation and/or credit counseling as your first resort. Learning how to manage your money on your own should be your goal. This will help you stay out of debt and avoid financial problems in the future.

The typical plan will consist of several steps that will lead to getting organized and taking action to reduce your debts in a systematic way. First step is to write down all you’re spending. If you don’t write down everything you won’t know where all your money goes. After you do this for a while (usually two or three months) you will be-able to tell where your money is going and see how you can adjust your spending habits to eliminate things that are not absolutely necessary.

The Second step is to develop a budget where you prioritize and plan your spending to make sure your essential bills are paid first each pay day. Then with any money left you pay the rest of the bills according to your priority list. Develop a spreadsheet with all of your debts and monthly bills on it and all pertinent information, such as interest rates. Categorize the spread sheet from highest priority to lowest priority and make your payments accordingly.

The third step is to stop increasing your debt. These steps can be accomplished simultaneously you must stop increasing your debt right away. Cut up your credit cards, maybe keep one for emergencies. By not increasing your debts you will see progress in reducing your debts faster. There are generally three approaches to paying off your debts, paying the highest interest rate debt first, paying the largest debt first, paying lowest interest rate first. Each will have its own advantages in terms of the progress you see. It does not matter which one you use as long as you are methodical and stick to your method.

The fourth step is cut all unnecessary items out of your budget. Find all of the areas of spending that you don’t need, for example, brown bag it for lunch instead of eating out, car pool to work and split commuting costs, etc. With the money you save use it to start paying down debts, start with high interest credit cards and/or loans. The more principle you pay each month the less interest you pay over all. As you pay off your debts call the creditor company and close the accounts. In fact it is a good idea to call your creditors and ask for an interest rate reduction; often they will lower the interest because they do not want you to default. You may also consider a consolidation loan or home refinancing if these options are available at favorable interest rates. You use the proceeds to pay off all debts except the consolidation loan or refinancing loan then you put all your available money into one payment.

The fifth step is to stick with it. Once you see your debts coming down and realize it is possible to get out of debt, develop some good money management habits and before you know it you can save money for the future and live debt free. In these troubled economic times it is a great thing to have control over your finances.