The only thing scarier than having zero money in the bank is having zero money in the bank and credit cards maxed out to their spending limit. There is a huge sigh of relief when you have lifted your mountain of debt off your shoulders or paid down to a manageable minimum. Paying off debt and reaching financial independence with hard work is possible.
Steps to Paying Off Debt
We live in a world when debt is considered normal. Almost everyone you know has credit card debt, a mortgage, or a car payment. You can pay cash for those things with careful and deliberate planing. It’s kind of crazy to think that our grandparents or great grandparents lived through the Great Depression when credit card debt wasn’t even a “thing.”
Determine What You Owe
The first step to paying off debt to know where you stand. You don’t want to pay bills as they arrive in your mailbox without knowing precisely how much you owe for all of your bills.
You want to organize your debt. You can do it with a pen and paper or use a tool on your computer like Excel, where you can create a spreadsheet. You want to know several things about your debt:
- The current total amount due
- The available credit
- The minimum payment due
- The percentage rate you’re being charged. (* This one may surprise you since credit card rates change frequently).
Get your total by adding all of your debt – including credit cards, money you owe to family or friends, medical bills, tuition, etc. Don’t let yourself guess at these numbers – either look at your current statement or better yet, call for a current balance in case you’ve charged more since the last one was mailed out.
Make it a point to stop spending on your lines of credit that day. You want the arrow pointing down, not up in terms of what you owe to creditors and lenders. Pay cash for things from this point on.
You will also need to write down your current monthly bills that aren’t based on revolving credit. This could include things such as:
- Electric bill
- Water bill
- Cable TV
- Internet Service
- Phone bill
Write down other monthly expenses including:
- Gym membership
This helps you see what exactly where your money goes each month. It might shock you to see it all laid out in front of you – especially if you’re used to juggling bills and living paycheck to paycheck.
Decide How You Want to Pay Things Off
There are two lines of thought in approaching how you should pay off debt. Both are considered the snowball method. Snowball means you start small and end up on a roll, making bigger payments.
The first snowball method is widely approved by financial experts. It involves you going to that list of debt that you created and listing it in order of highest to lowest interest rate. Using this method you will pay off the card with the highest interest rate first, which saves you money in the long-run because you’re no longer paying that high rate. This is sound advice, but there’s another train of thought you might want to consider.
The second snowball method starts similarly. List your debt in order of highest amount to lowest amount due. Pay no attention to interest (this is the area that took my husband and I awhile to wrap our heads around) and start paying off your lowest amount of debt first. (Then you work up your list until you have paid off your biggest amount of debt last.
Both ideas are good – only you can decide which approach better suits you. If you want to cheer yourself on and celebrate each milestone, then option #2 might work better for you.
If finances are of utmost importance, then you might want the first option – because you can celebrate the money you’re saving in interest. But pick a plan and then move forward.
Create a Family Budget and Stick to It
Without a family budget, you won’t make much progress in how you pay off your debt – no matter which option you choose. You know how dieting is all about calories in – calories out? Well money is the same. You want to spend less than you earn. Just as you listed your debt so that you could see it all spelled out for you, you have to do the same with your family income and expenses.
Write down what you earn and what your spouse earns. Pool all sources, including child support or alimony if you’re divorced. Add up the incoming monies and compare it to the debt that you have in regards to minimum payments.
You want to add everything – school fees or activities, birthday parties, Christmas, and fun things you do as a family. You might need to go back through past statements to see what you’ve spent on discretionary items.
You’re going to want to start building up a bit of a buffer or an emergency fund. You don’t want to spend every last cent that you make. There will always be a financial emergency that eats into your planning…so plan for it!
If you realize that you have too many bills all piling up at one time of the month, you can contact your lenders and ask for a new due date or billing cycle. This can help if you and your spouse get paid twice monthly, or weekly rather than one monthly payment.
As you start to get debt paid off, it’s important that you update your monthly budget to adjust for things you’ve paid off or paid down – or when you have more money coming in.
See more about Creating a Budget.
Figure Out How You Can Earn More and Spend Less
When you’re serious about debt reduction, you have to feel the belt tighten when it comes to spending money– or else you’re not doing everything you can to get out of debt fast enough!
Here are some things you can do to cut costs and save more money that you can put towards old debt:
- Get rid of unnecessary expenditures.
For example, do you really need the newspaper? Can you go online and read the news or watch it on TV instead? How about bottled water delivered to your doorstep – is it a luxury you can do without temporarily?
Do you have a landline and a cell phone bill? Would it be possible to get rid of your landline phone service and just go with a cell phone for the time being? If so, that’s one less payment each month.
- Cut back on existing packages.
Cable TV is a budget buster. You might spend hundreds of dollars getting tons of movie channels and special packages for sports and entertainment. Cut back to a basic plan. If you need to, invest in a Netflix account for much less than you would a cable TV package.
If you can bundle things to save money, do it. For example, you might have your phone, cable TV and Internet service all with different companies. You can save money by bundling it with one provider.
Make sure you and everyone in your family) understands the importance of shutting off lights and conserving electricity for your monthly bills. Same with water usage – don’t let the water run while brushing your teeth, and don’t do small loads of dishes and laundry – wait until you have a full load.
- Quit eating out.
Eating out at restaurants doesn’t help you stick to a budget. It might help you save time stopping by for fast food, but it can wreak havoc on your pocketbook and monthly budget.
- See who is charging you more.
If you have credit cards that are charging you annual fees, you can request that those be waived. Otherwise, you might want to shop elsewhere for a different line of credit with no fee.
You also want to check things like your bank accounts to see if they’re charging you a monthly fee for using their service. There are some banks that will do away with this charge to keep you as a customer.
- Make a meal plan.
People who shop without a list tend to spend more than people who make a weekly meal plan and budget for their families. Shop based on whatever coupons your local store is offering in the weekly paper.
Make sure you pack lunches instead of eating out at work. As Dave Ramsey says, you can live on beans and rice while you’re paying off your debt if you’re serious about it.
- Look for cheaper forms of entertainment.
Don’t have an official date night out every weekend where you’re shelling out for an expensive dinner and a movie. Instead, invite other couples over and have game night at your house with snacks and wine!
Once you have seen how you can spend less, look at how you can earn more! Whether you get a second job, host garage sales, sign up for programs where you host parties and earn money, or make money working from home online – you can put all that extra dough toward your old debt.
See more Budget Busters.
Once You Get Out of Debt, Stay There!
The most important thing to remember is that once you start digging your way out of debt, you can’t fall back into the old trap a second time (or third of fourth). Some people find spending is a hard habit to break.
When you pay off your debt, you might find it hard to see all of that available credit and try to resists the urge to charge your cards up again. Don’t do it! Try to save up the cash and spend cash instead of using your credit card.
Save up an emergency fund that covers at least 3 months’ worth of your necessary payments. That way, you’re covered in case you have an issue that lasts longer than a few days off work – or an emergency pops up that you weren’t prepared for.
Good luck paying off debt and staying there. You CAN do it! We used to have quite a bit of debt, but we snowballed our way out of it and have changed our spending habits.
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