Julie Bawden-Davis / Published December 21, 2011
Overview
Debt is a powerful drain on your financial profile and peace of mind. It makes you stressed about your future, keeps you from getting a good night's sleep and the worry can even lead to health problems. Though your situation may seem bleak, it is possible to pull yourself out of debt.
1. Calculate Cash Flow
Before you can create a realistic plan for paying down debt, it's important to know exactly how much money is coming in and going out. Chances are you have more debt than income. Knowing exactly how much you are in the negative each month enables you to make necessary adjustments.
Add up your income. Besides your regular paycheck, add in other sources of money, such as interest income, dividends, landlord income and child and alimony support. Add in only recurring income sources. To get an accurate average monthly amount, add up all your income for the past year and divide by 12.
Track your spending. Record all expenditures for one month, including major and minor expenses. The $4 you spend three times a week for a bagel and cup of coffee may seem insignificant, but those purchases add up to $576 per year. Also make sure to include recurring intermittent expenses like insurance payments, gifts and periodic home and auto repairs.
Subtract your monthly spending from your income. If the figure is negative, that's how much you are short. For instance, if you make $2,000 and spend $2,200, you have a $200 shortfall each month that could eat up your savings or lead to the use of credit cards or loans.
2. Slash Expenses
In order to stop adding to your debt load, you need to cut back or eliminate non-essential spending. Cutting back in the following areas can save you a significant amount of money each month.
Salon and spa visits. Rather than monthly visits, try going every two months.
Clothing. Chances are you have clothing in the back of your closet you haven't worn in a while. Rather than buying a new outfit, rotate your clothing.
Gym membership. Plenty of ways exist to exercise for free, including walking, jogging and swimming. This is an especially good category to cut if you find that you don't often get into the gym.
Restaurant dining. Eating out several times a week, including takeout, adds up. Decrease the amount of times you eat out to once or twice a month.
Food. Of course you have to eat, but you can save money by planning your meals around what is on sale. Clip coupons. Avoid relying on expensive prepackaged dishes and cook your own meals from scratch.
Electronic items. Get a prepaid cellphone and contract with a service provider that bundles Internet, phone and cable.
Entertainment. Seek out free or inexpensive options in your community, such as a picnic at the park or the many complimentary programs offered at your local library.
3. Prioritize Debt
Rather than trying to pay off all of your debt at once, which usually isn't feasible anyway, focus on one debt at a time. When deciding which debt to concentrate on first, consider interest rates and amount owed. Initially, you may choose to pay off a credit card or loan with the highest interest rate or instead focus on debt with the lowest balance. Consolidating your debt into one loan is another effective method, because it eliminates multiple payments each month and can mean paying lower interest. Whatever method you choose, keep in mind that in order to reduce your debt you must pay more than the minimum on credit cards each month.
4. Remember to Save
It's important to set aside a portion of your income for an emergency fund to cover unexpected expenses so that you don't derail your debt reduction plan. Aim for saving 10 to 20 percent of your positive cash flow each month.
5. Increase Your Income
Ramp up your debt-reduction plan by making more money. Even a small amount each month can add up to big savings. For instance, $100 more a month could pay off $1,200 in credit card or loan debt over the course of year. Consider taking on a part-time job, selling items through garage sales and on-line and starting a side business that capitalizes on your talents.
6. Stay Motivated
Paying down debt can be a bumpy journey fraught with potholes and setbacks. Make the necessary budgetary changes and stay on course and you will eventually reach your destination of financial peace of mind. Keep yourself inspired about getting out of debt by listing your debt reduction goals. Each time you reach a saving or debt reduction goal, reward yourself with something small like a book, a hike or a trip to the movies.
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