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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