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5 Steps to Controlling Your Debt Now

{ Posted on Mar 30 2010 by Marcus Alston }

  1. Budget
  2. Reduce Spending
  3. Apply Saving Tips
  4. Pay off Credit Cards
  5. Have a Plan

Budget.  Hopefully you read my post on writing a budget.  This is one of the first steps to controlling debt.  A budget helps you identify your income, necessary expenses, and discretionary expenses.  Your budget needs to be detailed and realistic because is it representing your financial picture.  If you have less income than your expenses, you need to know this and be honest with yourself to get your spending under control.

Reduce Spending.  After you have done your budget, focus on discretionary spending and see where you can cut expenses.  Housing, utilities, alcohol, cigarettes, food and restaurants, transportation, clothing, toys, pets, entertainment, personal care (such as barber/hair stylist, hair care products, personal care products, manicure/pedicure, cosmetics, massage/spa.), gifts, etc. are all candidates to see significant reductions.  It may be difficult to cut some areas, but this is the best way to control your debt.

Apply Saving Tips.  If you need help cutting your spending, go to my saving tips for ideas.  Make the payments you can afford to pay first on the necessary expense category.

Pay off Credit Cards. Credit cards are not necessary, but they are helpful, if used correctly.  If you do use credit cards, I advise paying off the balances in full each month to avoid interest  (normally in the range of 6% to 25%).  If you have balances, I suggest that you stop using the cards and working aggressively to pay them off.  Because you are obligated to pay your debts for credit card bills, credit card bills fall in the necessary expense section of my sample budget. If you have more than one credit card bill, there are two primary strategies you can use.  In both cases below, if possible you should pay more than the minimum overall on all your cards in order to reduce the debt relatively quickly and to avoid paying a lot of interest over time:

  • Strategy 1Pay off the Highest Interest Rate Card First (“Traditional”). Pay off the card with the highest interest rate first as fast as you can, pay the minimum on the other cards, and work your way down to the cards with the lowest interest rate.  Assuming you pay a certain amount, say $500 per month total on all your cards, this strategy helps you pay the least amount of interest overall, by concentrating on paying down the highest rate card, say 22% versus a lower rate card, say 9%, regardless of the balance.
  • Strategy 2. Pay off the Card with the Smallest Balance First (the “Momentum Method” or the “Dave Ramsey Snowball Method”). Dave Ramsey, financial advisor, radio talk show host, and author of The Total Money Makeover loves this one.  Pay off the card with the smallest balance first as fast as you can, pay the minimum on the other cards, and work your way to the cards with the highest balance.  This method could result in you paying more interest overall than the Traditional Strategy (assuming the card you concentrate on paying off first with the lowest balance is not also your highest interest rate card), but it may allow you to gain momentum psychologically by seeing one card after another get paid off.  For example, if you have a card at $7,500 and all your other cards are at $100, $400 and $700, respectively, you may feel better by paying the $100, $400, and $700 balances off first and then focus your attention and payments on the $7,500 balance. This method also most likely produces the quickest cash flow benefit by getting rid of the lowest balance cards and their payments the quickest.

Have a Plan. Make a financial debt reduction plan from your budget and set goals.  Your budget, your cost cutting, and your spending will dictate how quickly you can reduce your debts.

As I said above, if you have credit card debt, stop using your credit cards.  Debit cards are better, but they still allow you to overspend and exceed your budget.

To help you control debt even more, consider giving yourself an allowance per week and pay for items in cash only from this allowance.  Once the allowance is over, you should not spend any more for the week.  Use any extra money such as bonuses, tax refunds, inheritance, etc. to pay down debts.  Consider a second job or work overtime.  Resist the temptation to use your extra income to spend more until you control your debt.  Once you control your debt, revisit your budget and adjust it accordingly, but stay within budget.

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