Developing a Plan to Get Out of Debt Once and For All

Debt is one of the biggest problems facing Americans today. One reason it is so difficult is because it can be challenging to get out of debt once you find yourself buried in it. It is often paralyzing and prevents you from ever recovering. But, by developing a solid plan to get of debt, you will have a road map out of financial impairment and be well on your way to recovering from the possible financial devastation.

Calculate Your Total Debt

The most important aspect of getting out of debt is to fully understand exactly how much debt you are in. To do this, you need to add up the total amount you owe to each creditor so you have a tangible number to work with.

One easy way to summarize your total debt is to get a copy of your credit report. It will contain a list of your financial obligations to institutions who report to the major credit bureaus. There are a number of websites who offer free credit reports and make this a pretty simple process. To double check that all of your obligations are on the report, examine recent statements from your creditors to make sure your list is accurate. Also take into consideration any informal debts you might have, such as to friends or relatives, and add it to your total, as well.

Prioritize Your Debts

All debts are not created equal. For example, the mortgage you owe on your home is certainly not the same as the credit card debt you ran up over the holidays. When trying to determine which debts to pay off first, choose the one with the highest interest rate.

Or, another alternative to eliminate the sheer number of debts you have weighing you down is to pay the smallest debt off first. If your higher interest debts also have high balances, it can take years to pay one debt off. Smaller debts are repaid quicker and might be preferable to pay off first. Ultimately, however, you need to examine your unique debt situation and determine what is right for you.

Determine How Much You Can Pay

A thorough examination of your income is crucial to determine how much you can pay on your debt. This is not a situation where you want to find a few extra dollars. In fact, you will need to make some hard decisions to really work to pay down your debt. (Check out my last blog post, “Living Below Your Means- Can It Be Done?” for excellent ideas.)

Add up your earnings from your regular income. Subtract any essential money you must spend each month, including your mortgage or rent, utilities, food, medical expenses, as well as any current debt payments. The amount that is left is your disposable income, and a vast majority of it should go to pay down your debt obligations.

Create a Manageable Plan

Put all of the money you have allocated for debt reduction toward your highest priority debt, whether it is the largest interest rate or lowest debt. Don’t neglect any minimum payments on other debts, however. These should be considered more financial obligations, rather than debt reduction since the small amount does little to reduce the overall debt.

Once the first debt you targeted is paid off, move to the next one on your list. Use the extra amount you’ve allocated for the first debt and transfer it to that second debt. Continue with this cycle until each debt is paid off. This process can take years in many cases, but the benefits far outweighs the sacrifice of a few years.

It’s difficult to take any journey without an adequate road map. The same can be said for paying off debt. Without a full understanding of the problem and a way to alleviate the issue, it can seem nearly impossible to ever be in the black again. With some forethought and planning, however, getting out of debt truly is truly achievable with a great deal of persistence and patience.

Living Below Your Means - Can It Be Done?

We often hear about people living above their means, but did you know one of the quickest ways to get ahead financially is to seek to live below your means each month? This means spending less than you make with each paycheck. By saving the extra money, you will have a nice savings account, and over time, a substantial nest egg that can sustain you for years to come.

Spending less than you earn is really the only way to get ahead with money. During an economic time when it seems like it is nearly impossible to only spend what you make each month, how do you actually live below your means?

Save Money on Food

It might seem like food is one area you cannot cut back on when you spend money. In fact, this one area you can save you a tremendous amount of money each month if you are wise with how you spend your money on food. There are a number of things you can do to cut back when it comes to food but it is not a one size fits all approach. What works for one person may not work for another. The goal is to find a way you can can accomplish cutting back on food costs that you can stick with.

A few areas you can look at trimming your food budget are:

Buy Generic. Many times the store brands are the same quality as the name brand and they can save a tremendous amount a money.

Avoid Prepared Food. Buying food, such as frozen dinners and other store bought food that is already prepared can be a needless waste of money. They are overpriced and less healthy. Sticking to a simple meal, such as meat, salad, and bread is nearly as easy and substantially cheaper than their inferior overpriced counterpart.

Don't Eat Out Often. Many people eat out multiple times per week. While completely cutting the restaurant experience may be unreasonable. significantly cutting back can make a big difference in saving money.

Keep Your Car

While there certainly is truth to the fact that cars dramatically lose value over time, keeping a car for a long period of time can greatly lead to excellent financial health. When you are without a car payment, living below your means becomes much easier. Instead of finding a new car and creating a new car payment, save the money you would have put toward a car. This is a great way to regularly use less money than you earn each month.

Make Hard Cuts in Your Budget

There are certainly some areas of your budget that are easier than others to make cuts. Cut out the easy things but also take a hard look at things that may not be so easy. Are there areas of your budget that are more of a want than a need? Are you willing to give it up in order to accomplish your financial goals? A hard look at your budget today with tough cuts will pay great dividends tomorrow.

Limit Credit Card Spending

Credit cards almost make money seem like a fantasy. There is nothing physical that permanently leaves your presence. Using cash and greatly limiting your credit card use does two things: it reminds you of just how much you are spending each week and it forces you to live at a level that is congruent to your income. Ultimately, the goal would be to surpass the amount of your income versus your spending.

Clarify Your Purpose

Anyone who sees the value of living below your means has a reason behind it. Whether you are saving up for a big purchase or just pursuing a comfortable retirement, reminding yourself regularly of why you are doing it can be a very powerful motivator to help you accomplish your goals.

There are a number of ways you can save money to live below your means. Get creative in how your strive to decrease your spending each month so you have money to put away to save towards your future goals. When you spend less than your bring in each month, you are well on your way to great financial health.

The Steps to Building an Emergency Fund

Building an emergency fund is one of the most important things you can do for your finances. It can literally mean the difference between complete financial devastation and being prepared with a workable plan to build a sustainable bridge for your household budget.

Financial experts often tell consumers to have an emergency fund but few tell you exactly how to create and maintain one. However, next to getting out of debt, nothing is more valuable for your financial future. Here a few steps you need to consider as you look to build an emergency fund for your household.

Start Small

Building an emergency fund can seem like an insurmountable mountain to climb. It is doable, however, even on an extremely small budget. The key is to start small. If you are only able to put aside $10 a week, do it. In fact, that $10 will build up to $520 in a year’s time. What looked like measly pocket change can turn into a big chunk of change in a short time.

The goal early on in this process is not as much the amount, as it is to just start the process and develop the habit. As you make other cuts in other areas or raises roll in from work, you can increase this amount later. At this point, sit down and figure out what you can reasonably afford each week at this point in time.

Automatic Deduction

Let’s face it: even the most self-disciplined person in the world would be tempted by unused cash sitting in their bank account. That’s why it’s important for the amount you determine, big or small, that goes towards your emergency fund be taken out each week without question. Do it before you pay your bills or go grocery shopping. Even better, set up a payroll deduction that automatically goes into a savings account for your emergency fund. You will not miss the money, but it will be waiting for you when you need it.

Reduce Expenses and Save the Extras

Do a thorough examination of your budget. Chances are, if you look very hard at each place you spend money each week, you will find one or several places you can eliminate or greatly reduce your expenses. Don’t just let that money slip into a budget black hole. Take the extra money and apply it to your emergency fund.

Pay Your Debt…Even After It Is Paid Off

Getting out of debt is an important part of good financial health. While putting a small amount towards an emergency fund is still important, you should focus most of your financial effort on getting out of debt. When your focus is there, it will be reduced much more quickly.

When the debt is finally is paid off, don’t stop! If you were spending $300 a month towards debt, transfer that same amount to your emergency fund once your debt is completely paid off. It is all too easy to funnel that money into another expense once the debt is gone. Resist that temptation and focus your efforts on your emergency fund until you get it at a level you wish.

Set a Lofty, Achievable Goal

You will get as many suggestions of what an ideal amount for an emergency fund should be as people you ask. But the general rule of thumb for your long term goal for the fund should be at least 3 months worth of your income. Even better would be 6 months or 12 months of your income. However, in the beginning a small goal is best. Once all of your debts are paid off, a loftier goal is in order.

Setting up an emergency fund can be done even on the smallest of incomes and budgets. With a little dedication, even in the midst of debt, an emergency fund can be set up and easily maintained. By setting small goals and gradually increasing them, an emergency fund is achievable.