If you are like many Americans, you may be finding yourself over your head in debt. With many losing jobs yet having rising expenses, people are not only becoming more accustomed to living on credit, but also becoming less likely to be able to pay all of their bills.
Once you start riding the slippery slope of skipping payments, you begin accruing various penalty charges, higher interest rates and more. Soon, your debt load will be impossible to pay. For some, bankruptcy may be inevitable. But, long before that, you are hopefully taking some significant steps toward getting out of debt and learning how to live as a financially responsible person!
Here are five steps to take that will help you get out of debt:
1. Assess Your Income and Your Spending
This means writing down exactly how much money you make each week or month, and exactly where every dollar is spent. Once you document where every dollar comes from and goes to, you will start to see some distinct patterns. Analyze the information carefully. Some guidelines to consider are spending no more than 25% of your total net income on housing (rent or mortgage), and no more than 60% of your total income on all of your loans (mortgage, auto, personal, student, etc.) and credit card minimum payments each month. These guidelines may seem tight, but they come from the basic qualifications that banks look for in a potential homeowner, making them fairly solid guidelines to follow for good financial health.
2. Get a Comprehensive Credit Report
Find out what your credit score is, and what factors are affecting it. Make sure that everything listed in the credit report actually belongs to you—you would be shocked to realize how many credit reports contain serious errors. As you get out of debt and watch your credit score rise, you want to ensure that all of the information is accurate.
3. Make a Budget
Of course, if you are like most people, after step #1, you will be horrified to discover that you are nowhere near these guidelines. So, where are you spending your money? Start out by listing the things that you cannot avoid paying for (housing, transportation, food, utilities, student loans), then list your other monthly expenses and the exact amount you can allot for each. Be sure to include some sort of savings, experts recommend that you put away at least 10% of your net income to save for unexpected expenses or your future.
4. Cut Out Unnecessary Expenses
Are there things that you can live without? Do you really need to have 600 channels on your cable service? Can you make your coffee at home in the morning instead of spending several dollars on the way to work each day? How about a bag lunch a few days a week? Are you using your gym membership (although you should be, if you are not then you should cancel and get out of the monthly fee). Watch your utility usage—turn your heat or air conditioning down and replace your light bulbs with energy efficient versions. Each of the costs that you cut will leave more money in your budget that can be put toward getting out of debt.
5. Start Paying Off Your Debt!
There are two functional ways to do this—one helps you get out of debt, and the other may help you set smaller, interim goals that will help keep you on track. The fastest way to get out of debt is certainly to put as much money as you can toward paying off your highest interest loans and credit cards. The faster you pay these off, the more you are going to save. But, if these accounts have large balances, this may seem like a very daunting task. This leaves another option, paying off the smallest debts first, so that you can essentially “cross them off of the list.”
When you start seeing the list of people or companies that you owe money to start getting smaller, you can see your progress—which can be highly motivating. Plus, even though these might be smaller amounts, you can then take the money that you put toward each of these monthly payments and put it toward the next largest bills. As you pay off smaller debts, you will start to have more money per month to put toward the larger bills.
If you follow these guidelines, you will find that your debt slowly but surely will go down. If you are finding it difficult to make ends meet, consider finding a second job to get some extra income, and then be sure to put that extra income toward paying off your debt! You may never be completely debt-free, but you will find that you are much more comfortable!