There is no better time than today to begin reducing your debt. Any money you owe will cost you even more money as long as you carry an outstanding balance. Take a fresh look at your debt situation and consider two basic strategies for improving your position – pay off old debt faster and avoid incurring new debt.
Understand What You Owe
Make a list of everything you owe that will not be paid within the next month. This does not include normal monthly bills such as electricity and gas for your car. It does include your mortgage, home equity, car loan, credit card bills, student loans, and medical bills. Write down the amounts due, the monthly or minimum payment, and the interest rate charged. The result may be a staggering number, but it’s better to be informed.
Start Making Larger Payments
Every dollar you pay that is more than the required minimum payment on your bills will begin to reduce your total debt by reducing the amount of interest you owe and shortening the time required to reach a zero balance. As your balance gets smaller on many types of bills, your creditors will show a smaller required minimum payment. Don’t be misled. Keep making the highest possible payment until you have paid off the whole amount.
If you have money in an ordinary savings account that earns only a tiny amount of interest, you are probably better off using those funds to pay off debts, since the interest cost of the debt is likely to be considerably higher than the earnings on the savings account.
If you can completely eliminate a couple small debts by paying them off first, it’s usually a good idea to do so. Having fewer creditors simplifies your situation and being able to cross a couple debts off your list will give you a feeling of progress.
Spend Less
There is no magic pill that can keep you out of debt. You have to learn how to spend less than you earn. There are many ways to approach it, and you will find things that work for you.
Consider leaving your credit cards at home. Having credit cards can be important for emergency situations, but taking them along when you go to the mall is setting yourself up for spending. Take cash and spend only what you can afford to spend or find a new activity that exercises your body or your brain and not your wallet. If you are an online shopper, don’t use one-click ordering. Force yourself to take out the credit card and enter the information if you want to purchase something online and think about whether you really need the item.
Beware of credit cards with rebates. The only time a rebate works is if you pay the entire balance on the card at the end of the month so you incur no interest charges. A one percent rebate does no good if you’re paying ten times that in interest charges.
There are numerous ways to reduce your expenses. Things such as cooking at home more often instead of eating out, avoiding daily habits like expensive coffee, quitting smoking, and giving up premium channels on the cable or satellite service can cut your spending. Consider the power of swapping with friends and family. If you have a huge library of books, music CDs, or movie DVDs and so do your friends, why not trade with them instead of buying new ones? Take it a step farther and barter services. You can exchange your skills and abilities for services that someone else can do and you can’t.
The power to reduce or eliminate your debt is in your hands. There is no one looking over your shoulder to see if you buy that new television. You have to decide for yourself that you’re ready to enjoy the peace of mind that comes from not having large debts hanging over you, and be willing to discipline yourself to reach that goal.