You finally have a good job and a great salary; it’s time to start setting some money aside for the future. Unfortunately, no matter how hard you try, you just can’t seem to save enough cash to open even a simple savings account.
The problem is that you’re stuck knee-deep in debt, and every penny that goes into your pocket comes right out to pay the interest.
Not only are your debt levels not dropping, they’re rising. And you’re already contemplating borrowing more money just to pay the interest on your current debt. What can you do when there is no end in sight? Follow these seven steps; not only will you reduce your debt, you’ll eliminate it.
1. Use common sense
The best way to reduce your debt load is to use some common sense. The No. 1 reason people have so much debt is because of how easy it is to obtain and use credit.
People fail to realize how much they have already spent, and before they know it, they’re maxing out their credit cards on a monthly basis. The best way to know just how much money you are spending is to pay for everything in cash.
This means using credit cards only for emergency purposes, such as unexpected car expenses and medical emergencies. By paying with cash, you will gain a better appreciation for every hard-earned dollar.
2. Stop impulse-buying
If you want to freeze your debt, you must freeze your spending, especially if you don’t have the income to support such high levels of debt.
If you continue incurring more debt, you soon won’t even have enough funds to pay for the interest. So unless it’s an emergency, stop making impulse purchases.
3. Develop a plan
There is an old saying in the financial world: If you fail to plan, you plan to fail. This advice applies to everyone, including family households.
Start by developing a road plan that will take you to debt-free zone. You need to know how much your total debt is and how long it will take you to pay it off given your current payment plan.
The next process involves establishing a budget. List all your revenues and keep track of your expenses. This will give you a better idea of how much money is coming in, how much money you’re spending on different activities, and whether or not you can sustain your current spending habits.
Once you know exactly how much you’re spending, it’s time to cut back on unnecessary expenses.
Take a close look at each expense and determine which ones can be eliminated. You can then use that extra money to lower your debt.
Cutting back takes a lot of willpower. If you find it difficult to do so, I suggest you set up expense jars. They work in a very simple manner: Set up a jar for each main activity, such as movies, clubbing, restaurants, fast food, gas, and so on.
Every month, put cash into each jar according to your budget. Once the money is gone, stop that particular activity. If there is money left over, apply it to reducing your debt. As rudimentary as it may seem, this technique works wonders.
4. Research money-saving options
Look for money-saving opportunities like low interest rates and credit card offers. Before settling down with a creditor, shop around. Most people are afraid of banks; they think that it is still as hard to get a bank loan as it was in the early ’50s. But today, most creditors are eager to lend you money. Don’t be afraid to negotiate the rates.
If you don’t have time to shop around and compare lending rates, you can always check out BankRate.com. You’ll get an instant look at the average rates on various types of cards, as well as links to the best credit card deals.
Carefully look at these different plans. Some credit cards allow you to cut your interest in half simply by paying an annual fee of $20. Imagine that: You pay $20 once a year and your annual interest rate gets cut from 18% to 9%.
5. Take action
Don’t be lazy. Formulate your money-saving plan today and follow it to a tee. Just because you know the way home doesn’t mean you’ll actually get there until you take action.
Most people do develop a debt management strategy. The only problem is that they forget or don’t have the willpower to go through with it. Discipline is key, so get ready to whip yourself out of debt.
6. Don’t close credit card accounts
When you close your credit card accounts, you reduce your options. As long as your current credit card companies aren’t charging you any fees for inactivity, it’s in your best interest to hang onto your accounts.
The problem with closing accounts is that you’re at the mercy of whatever credit cards you decide to keep. That’s the equivalent of having to shop at one store no matter how good the prices are elsewhere.
Plus, when credit card companies notice that you’re not using them anymore, they’ll generally send you an offer that saves you money.
Always keep your options open and be ready to switch banks once you get a better offer.
7. Always pay on time
The worst thing you can do is make late payments. If you let the deadline pass, you’ll pay interest on the full credit card balance as of the purchase date.
The late fees hurt you immediately and would be better used to reduce your debt. They’re also a strike against your credit rating and future bargaining power.
By paying late, you also diminish your chances of getting the best rates and deals on a car loan or a mortgage. In the long run — especially in the case of a mortgage — that kind of negligence can cost you thousands of dollars.
Debt management is an important duty. Use common sense and willpower to control your spending habits. Shop around for the best rate before settling with just any credit plan and always pay on time. Remember that knowing is only half the battle.