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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.
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October 13th, 2008 at 6:11 pm
This is a great article. It is hard to face the truth, but it is so important in getting free of debt.
October 13th, 2008 at 6:14 pm
I completely agree. I had a hard road to travel, but it was SOOOOOOOO worth it!
October 13th, 2008 at 7:30 pm
Suze Orman calls it “living a lie” – I ALWAYS feel better when I’ve faced something I find unpleasant, and get on the other side of it!
October 13th, 2008 at 8:31 pm
do I really have to look at them??? LOL!
October 13th, 2008 at 9:13 pm
My husband and I became “aware” once we started to do our budget on Excel. Wow eye opening, but worth it. We made huge changes (including moving to a different state for a better job) and are on our way to debt free living!
October 13th, 2008 at 9:59 pm
Great article.
I am a big fan of Dave Ramsey and he actually advocates paying off the smallest balance first. Then once the first debt is paid off you take the money you were paying towards it and start putting that towards the next smallest debt and so on. It snowballs.
I agree on trying not to make your budget too restrictive. My dh and I both budget a monthly amount of blow money for each of us. This is our monthly allowance to spend as we so choose. It really makes the budget feel less restrictive.
The other thing I would add is to save up a small amount of money in a small emergency fund prior to paying down debt. Our goal is $1000. Then if an emergency comes up you will not be forced to go back to using your credit cards.
October 13th, 2008 at 10:49 pm
I 100% agree with debt free living. I’m etching my way out of debt right now. It aint pretty but I’m getting there!
October 14th, 2008 at 7:23 am
Great article to begin the process of being financially responsible!
October 14th, 2008 at 8:52 am
My husband and I paid off all of our “bad debt” last year. We still have our mortgage, but it really feels great to only have to pay utility bills, etc. Once we get the house paid off we will be “home free”…haha.
October 14th, 2008 at 9:29 am
We are trying to very hard rigth now to get out of debt. I have went from being a WAHM(still do that) to being a work out of home mom. I have a part time job to help pay some of the bills and our goal is to have all of the little things, and the CC paid off by the end of the year. Plus I can have so much taken out of my check each pay-day and they will give it to me in November, so thats kind of a bonus too!
Brandi
October 14th, 2008 at 10:03 am
We have been doing Dave Ramsey’s Total Money Makeover for almost 2 years now. I’m now an at home mom and we only have 1 student loan and our mortgage left. SO worth it in today’s economy to not have all of that debt. We have successfully paid off over $80K in 2nd mortgages, credit cards, student loans, and car payments.
I’m hoping that after tax time this year we will be able to knock out that last student loan. We keep a $2,500 emergency fund, only b/c our medical insurance deductible is $1,000 and we have small children. Should anything happen we just feel more comfortable having that amount available. When it rains it pours, I assume that if something happened medically our car would also break down, so that makes us feel more secure.
We are in a nice home in a nice neighborhood, but our mortgage is 1/3 of what we’d been approved for. I’d love all the upgrades, but you know what? The ability to pay the mortgage with ease is MUCH better.
October 14th, 2008 at 11:33 am
We are also currently on the Dave Ramsey Program and have gotten rid of almost 90K in Debt since September of 2007. I love his program and it defintely takes away alot of financial stress. I am also a SAHM and love the fact that I am able to stay home with my kids. If you do this program defintely get the TOTAL MONEY MAKEOVER book and listen to Dave’s Radio program, it is really encouraging and his gives you great help and advice.
Erica
October 14th, 2008 at 3:18 pm
This is a great article!
October 15th, 2008 at 6:46 am
If you really want to get out of debt, go to http://www.daveramsey.com He will really help you!
October 15th, 2008 at 9:24 am
We are trying very hard to get out of debt… and it’s hard but we know it will be rewarding in the end. For now we treat it like a game… trying to see how far we can stretch each dollar! It keeps it from becoming a drag.
October 15th, 2008 at 10:43 am
Lot’s of Great info. I have been watching Suze Orman on Oprah as she has been on often lately also. Any tips that will help us are so worth it!
October 15th, 2008 at 1:22 pm
I love Mary Hunt and her Cheapskate Monthly–the art of living BELOW your means. We’re not quite there yet, but have been about 90% cash only for the last 4 years.
October 19th, 2008 at 10:19 am
I agree.. Dave Ramsey is the best. No nonsense plan.
October 21st, 2008 at 11:28 am
I really liked this article. I have just recently created a budget and started paying down debts, and it is a hard thing to do! Thanks for the advice.
October 21st, 2008 at 1:09 pm
We are currently working on living debt free. It’s an adjustment for sure, but much better than owing your entire paycheck every 2 weeks.
October 22nd, 2008 at 1:10 pm
I use the snowball method. It works if you stick to it.
October 22nd, 2008 at 2:18 pm
Great article!! The HARD part is realizing that we don’t DESERVE to be able to blow money… we just DO it!
October 24th, 2008 at 3:28 pm
What a timely article. We all need to take more responsibility for our own debt! And work on reducing it!