The holiday season has now passed, and most people have substituted
their pre-holiday-shopping-excitement with a
post-holiday-debt-depression. Before debt threatens your New Year's
happiness, here are five techniques for cutting down consumer debt, and
getting you moving towards better finances in 2012.
1. Refrain from racking up additional unsecured debt.
You
do not have to dump your credit and charge cards, but you do need to
give them a rest. Additionally, don't think of your card(s) as a
resource in case of emergencies. Instead, arrange for unexpected
emergency expenditures in a way that does not require reliance on credit
(see item #5, below). Remember, giving up the credit cards will not be
easy, but you must bring in more money than you spend each month, and
halting all credit use is a great first step.
2. Examine your debt.
Consumer
debt experts recommend that you take a look at your financial debt. For
starters, you ought to take inventory of all debt, including student
loans, mortgage(s), personal loans,
credit card
debt, payday loans, and so forth. Examining your debt, while pretty
stressful, serves an important purpose. It allows you to view how much
you owe, realistically. After that you should group your debt, isolating
the beneficial debt from the unsecured debt that is so damaging. This
will allow you to discern the kind of debt that does not serve you, from
the kind that does. For instance, a mortgage loan, while a significant
expenditure, isn't necessarily bad because you're building home equity
in the process. How great! And school loans, while burdensome, are
necessary in order for you to get the skills required for higher-paying
jobs.
What good news! Once you observe you financial obligations in this
manner, it may help to lower your emotional anxiety with regards to
them.
3. Draw up a repayment plan.
The most direct way to
repay financial debt is just to start. Yet, prior to putting one cent
towards that debt, you need to develop a preferred plan. The following
are a couple of the most common techniques:
The "Debt Snowball" -
This technique surmises that it's best to manage your debt by focusing
on credit card balances. You start by arranging your accounts according
to how much is owed on each, with the largest account at the top, and
the lowest on the bottom. Every month you will pay the minimum amount
due to each one listed, but give special attention to the very last
balance ("Account A", the one that has the smallest balance owed). To
"Account A" you will pay the required minimum, plus an extra amount. You
can pay off "Account A" pretty fast because it's got the smallest
balance, and move on to the next lowest balance on your list ("Account
B"). Now, to "Account B" you will pay the minimum amount, plus the
minimum amount you were paying on "Account A", plus an extra amount.
When "Account B" is repaid you'll keep with this system for all
remaining accounts. The good thing about this method is that it provides
a bit of success along the way, to help you stay motivated to move up
your list and pay off that debt.
The "Debt Avalanche" - This method is comparable to the "debt snowball", but focuses on interest rates instead of
account balances.
Thus, you'll arrange your current balances with the top being the
low-interest account, and the bottom being the high-interest account.
Monthly, you will pay the minimum amounts due on all accounts. But you
will focus on the balance with the highest interest, and pay off this
one first ("Account A"). To "Account A" you will pay the minimum, as
well as any extra cash you have. Using this technique you will repay
"Account A" relatively fast (the amount of time it takes is determined
by the actual amount owed), but you will save a lot on interest charges.
Once "Account A" is totally paid off, you'll go to "Account B" and pay
the minimum for that account, plus the minimum from "Account A", plus
any other cash you've got on hand. As soon as "Account B" is repaid you
use the same process to resolve all remaining accounts. This technique
will keep you from potentially spending thousands in cash on higher
interest rates.
4. Adhere to your credit debt payment plan, even when things get tough.
No matter whether you prefer the "debt snowball" or "debt avalanche", a couple of things should be included in your approach:
-Set up automatic payments. Select the date that
works
best for you, for example, you might prefer that auto-pay occurs a few
days after you get paid. The most important thing is that the payment be
submitted by the date it's due.
-Pay in multiple installments.
Rather than just paying via a single transaction per month, why not
split your total payment in half and pay it twice a month? This has two
advantages: First, it will reduce interest assessed because your balance
will be lower by the end of the billing cycle. Second, it will make
certain that, in the instance of a cash flow problem during the month,
that at the least some of your balance will get paid that month. Again,
the important thing is that all minimum payments are submitted before
they're due.
5. Create a "rainy day" account.
For some, this
is a difficult assignment (didn't I already encourage you to place "all
extra cash" towards paying off you debt?). Nevertheless, creating a
"rainy day" account is essential, and will prevent you from mounting
credit card debt that often arises after an unexpected expense. While
the assertion that all additional funds must go towards paying down debt
seems sound, it becomes a lot less so when your car breaks down, or you
get sick and have to miss work. Though distressing, you need to
anticipate that emergencies occur, and that personal savings are an
absolutely must. Besides, what is the purpose of repaying your credit
balances just to have them rise again because you had to use your credit
cards to pay for life's necessities? Make this the year you get free of
this vicious pattern.
The best way to start your rainy day
account is to get a high interest CD, savings account, or money market
account (rates for online banks are often better than rates you'll find
at brick and mortar banks). I recommend the high yield savings account
because they require low/no minimum balances, and offer easy access to
your money when you need it.
And how will you raise the fund
necessary to open such an account? To begin with, start by cutting down
on something small; get rid of one or two expenses a month. For
instance, rather than eating dinner at restaurants two times a week,
save the amount of money you'd have used for those meals. And if you
have a lot of unnecessary expenses (like a hair dresser, nail person,
gardener, and so on) cut these expenditures completely, for a few
months, and save this money instead. You might have things in your home
that you never use, for instance apparel, furnishings, or consumer
electronics. Selling these items can generate some income as well. And
of
course,
if you are anticipating a tax return, do not plan to spend it, but
instead decide to have the whole sum direct deposited into a high yield
savings, CD, or money market account.
Building up your savings
will not feel too beneficial, but you will be very glad to have such an
umbrella when a rain storm appears.
Whether you are a "budgeter"
or not, these five New Year's resolutions will assist you in decreasing
your personal debt this year. Like most plans, you need to start by
modifying your behavior. As time passes, each little change you're
making (that is, not using those credit cards, eating more meals at
home, etc.) will lead to considerable results over the course of a year.
Then next season, rather than experiencing the crunch of holiday debt,
you can enjoy the holidays and be debt and worry-free.