This past weekend my girlfriend and I were at the mall, which I believe is her favorite place on Earth, she had just gotten paid and that money was obviously burning a hole in her pocket. We went to several of her favorite stores, (I'm withholding the store names to protect the innocent), and she spent quite a bit of that paycheck she just received. At one of those stores she spent just over $130, at another shoe store she spent just under $50 and then there was more spending at the make-up counters at two of the anchor stores at the mall. While we were there, I was just there looking, an observer. I didn’t buy anything – not that there weren’t several things that caught my eye, and would’ve looked good on me – I didn’t buy anything because I didn’t need anything. When we were leaving the mall I made the comment that I saw many things in the mall that I liked, and my girlfriend acknowledged that I would’ve looked good in several of the outfits. Then she made a comment that didn’t really strike me as significant until just before writing this article. She said she wished that we had $2,500 that we could use on a spending spree without having to worry about it. My response was why not make it $5,000, that way I could buy a really nice watch. We laughed and rambled on a bit further about this fantasy, and that was it. Later in the weekend she and her daughter went to a discount retailer and she spent more money. My point here isn’t to pick on her and her spending habits, rather it is about what she said when we were leaving the mall. It wasn’t that long ago when I was up to my eyeballs in debt, credit card debt to be specific. It didn’t take me long to dig myself into that hole once I got serious about it. If you find yourself staring down a mountain of debt, and have finally quit wishing for some sort of financial windfall that would solve all of your problems, here are some tips based on what worked for me: Step 1: Evaluate your debts Collect all your financial documents and print out your credit reports so you can find where you stand. This is an important step toward debt recovery; one that many people are often scared to take, because they are afraid to see how bad things might really be. Then write down the balances, interest rates, and monthly amount due for each of your debts. Include your car loan(s), any personal loans, payday loans, credit cards, and any other debts you may have. You should also make note of any annual fees that your credit cards might have. It isn’t necessary to include your mortgage or student loans at this time; these have relatively long terms and low APRs so it is better to focus on paying off your other debts first. If you have an overwhelming amount of debt, you may want to seek out a debt counselor. Step 2: Look at your budget After you have collected the information about your debts, you should take a look at your monthly budget. Write down your monthly income after taxes and subtract your rent/mortgage payment from this amount and other monthly expenses such as childcare, student loan payments, insurance, utilities, and groceries. Once you have subtracted all of your expenses, calculate how much you have left to pay off your debts. If this amount is too small, look for ways to reduce your spending. Consider cancelling your cable or your cell phone as ways to cut back temporarily. Remember you are going to have to make sacrifices so that the more you can pay towards your debts each month, the sooner you will be debt free. Step 3: Make a plan Now that you know all about your financial situation, it's time to create a plan for reducing your debts. Use the information from Step 1 and 2 and create a chart where you subtract your minimum debt payments (Step 1) and monthly expenses (Step 2) from your monthly income after taxes. The remaining money should be used to pay off the debt with the highest interest rate and the highest balance. I should point out that while you are targeting individual debts for payoff, you should continue making the minimum payments on all of the other debts. Continue doing this each month until that first targeted debt is paid off and then move to the next highest rate/balance account. This is called “snowballing” your debt, and it is the fastest way to reduce your debts because you take how much you were paying on the first debt and roll it into your next account and continue the process until all of your debts are paid off. It should go without saying that during this time you should not charge anything new to your credit cards, in fact you should remove them from your wallet. Step 4: Start negotiations While you are following your repayment plan from Step 3, you should contact your creditors and lenders and see if you can improve the terms on your debts. You may be able to lower your interest rates or negotiate a reduced settlement on some debts by speaking with the customer service department. It is especially easy to negotiate the terms of debts that are charged off by a creditor or already in collections. You might want to think about moving some of your credit card debts to new accounts with lower interest rates. Moving a balance to a credit card with a 0% introductory rate for 6-12 months can help you save a lot on interest. If you do this I would recommend cancelling the credit card which you transferred the balance from, just to avoid having access to more debt. I know what many of you are thinking, that cancelling credit cards puts a ding in your credit score; but at this point your credit score should be the least of your concerns; avoiding the temptation of accessing more credit and debt pay-downs should be the only focus. Once you are debt free your credit score will start to improve significantly. You might want to begin looking into whether or not consolidating your debts into a personal loan or home equity loan could help too. Step 5: Follow-through Try your hardest to meet your payment goals each month. If the amount you put toward your most expensive debt each month varies, that’s okay, because often times your monthly expenses varies from month to month. Just be as consistent as possible in putting as much as possible toward your debts. Signing up for an automated payment system and keeping a chart of your progress on the refrigerator can help you stay on track and keep your eyes on the prize. As you reach major milestones, such as paying off each of your debts, you should certainly celebrate these successes, but with something reasonable and without using your credit cards. Through patience, diligence and discipline, you will soon find that you will be debt free.
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