As a mother and a blogger, I’ve become accustomed to being financially strapped. When my husband and I first got married, we had no money and a lot of debt. As you can imagine, times were stressful as we were first getting our feet under us.
We followed all sorts of financial advice, but it was actually a hodge podge of theories that did us the most good. So, here are a few tips and tricks to get you out of debt into the sweet, forgiving arms of financial freedom. It’s hard, but you can do it.
Make a Budget –
Sounds simple, right? Well… it is. Following that budget is the difficult part. My father still sits in the kitchen every Saturday morning and fills out his check register with the week’s financial information. And while this is effective, there are more technologically advanced ways of going about it.
After you’ve set up your budget, you’ll want to make sure you can keep up with it. Companies like Mint have budget calculators, which helps you stay on top of your spending habits and see where you can cut back a little.
But the real key to a successful budget is what you include in that budget. Of course, this is all about debt, but you do not want to include your debt numbers on your regular budget sheet. These numbers will go on a separate budget sheet. Here’s what you’ll want to include:
-Total income for the month
-Total surplus (income minus expenses — we will use this later)
-Total required spending for each month (mortgage, cable, electricity, etc.)
When creating this list of numbers, you’ve got to be honest with yourself about how much you make, how much you spend, and what areas you need to work on.
Cut Your Spending and Expenses –
Overspending is probably what got you into debt in the first place. This, of course, is an over-generalization, but the theory of cutting on spending is important whether spending did get you into debt or not.
The key to creating a great budget is simply going through what you spend money on and cutting back on non-necessary expenses. This includes eating out at restaurants, getting clothes drycleaned, or anything else that does not directly help keep a roof over your head or push your debt in the right direction. You can also cut spending by looking for sales, using coupons, or buying things in bulk. You want to have as much money as possible going toward paying off your debt, so it’s high time you start looking at those extra expenses.
Save Less –
What? What are you going to do if you’re not saving? The truth of the matter is that if you have the money to save, you’ve got the money to get out of debt. The more money you save while in debt, the more money you will eventually spend, depending on interest rates.
Here’s an example: Imagine you’ve got $10,000 in a savings or checking account and $10,000 in credit card debt. The average savings account earns about one percent (1%) interest over the course of a year… if you’re lucky. That means that based on interest alone, you make $100 per year in interest. The average credit card holds a 15 percent (15%) interest rate, meaning you’ll pay $1,500 just in interest over the course of that same year. Would you rather pay $1,500 over the course of a year to make $100 or save money in the long run by paying down that credit card?
This, of course, does not mean that you should eliminate your savings all together. Having an emergency fund for unexpected things outside the budget is really important, especially in a recession.
Make a Debt Budget –
Making a debt budget allows you to track your debt numbers and see progress as you pay them down, which is crucial from a psychological standpoint during this whole process. But it also makes practical sense.
Now, remember that surplus money from your budget? We are going to take that money and apply it directly to your debt. The key here is, though, that you want to find out which debts have the highest interest rates. Then you should order your debts based on their interest rate. We’ll get to the highest interest rate debt here in a minute, but you should pay the minimum payments on all other debts. Then, you’ll need to allocate the remaining funds for the highest interest rate debt. Put as much money as possible onto that debt. Once you’ve paid off that debt, do the same thing for the next debt on the list.
Transfer to Credit Cards –
This may seem counterintuitive, but it actually helps in the long run.
First thing is first — if you’ve maxed out your credit cards, cut them! There is no need to continue to use maxed out credit cards when you’re on the right financial plan.
If you have a low-interest credit card that isn’t maxed out, transfer the balance from one of your higher interest cards to that account. This gives you more leeway when paying down the debt and saves you money on interest payments in the long run.