How to Pay Off Debt – Excessive debt can be devastating to your financial growth. This article gives a you a step by step plan to pay off your debt, and explains how to keep more of your money, in the future.
There are three important rules for paying off your debt:
1. Stop increasing your debt!
2. Spend less than you earn.
3. Use the remaining income, to pay down your debts.
Here we go. :-)
Stop increasing your debt
If you don’t already have a Visa or MasterCard -debit card- tied to your bank account, try to get one. A debit card can be useful for making any purchases that you might otherwise place on a credit card
Gather all your credit cards together. Put them in a box, in a drawer.
If you have any automatic payments that use your credit card accounts, change those payments to use your bank account instead.
Do not finance any more purchases.
When you need to make a purchase, use cash, a check, or your debit card.
Merrily digging himself out of a hole.
Spend less then you earn
Write down what you earn each month.
Write down 70% of that amount. Lets say someone earns $2000 a month, after taxes. 70% of that is $1400. This amount is your “spending money”.
Write down all your monthly expenses, starting with rent, food, and utilities.
Now for the challenging part. You have to figure out how to pay all of your expenses, out of your spending money. If you are like most people, this will involve cutting out some expenses, and it won’t be easy for you. However, learning how to spend less than you earn is absolutely vital for your financial success.
If there are major changes required to spend less than you earn… make the changes! Is your rent too high to make it work? Move into a smaller home. Do you live within a public transit system? Consider using it more. Do you eat fast food a lot? Make some lunches at home, they are less expensive and healthier for you!
Related Resource: If you have been trying to reduce your expenses, but you are having trouble meeting basic needs on 70% of your income, this page may help: How to Survive on almost nothing.
Note: Spending 70% of your earnings is not an absolute rule. Anywhere between 50% and 90% can be reasonable, depending on your situation and preferences. When I was getting out of debt, I wanted to do it as fast as possible. I probably hovered around spending 60% of my income, most of the time.
Use the remaining income to pay down your debts
Take that remaining 30%, and use it to pay off those credit cards and other debts. Pay off any credit cards first (before other types of loans), because credit cards tend to be the most expensive kind of debt.
Watch for offers from your credit card companies to transfer higher interest debt to another card, at a lower interest rate. This can save you large amounts of money each month, which you can use to pay down your debt faster.
I recommend paying off the credit cards with the smallest balances first. Those cards can be paid off relatively quickly, and then you can use the extra money to start paying on the larger cards.
You could also pay off the cards with the highest interest rate first. Either choice is fine, it’s really a matter of personal preference.
Debt management services
There are professional, nonprofit services available to help people to pay off debts. These organizations offer individual Credit Counseling, and Debt Management Plans (DMP). If you are over extended with your debts, a Debt Management Plan may help you gain control of the situation.
A Debt Management Plan is not a loan. The client makes one monthly payment to the plan provider, which they distribute to all the clients creditors. Often, the monthly payments made through a DMP are lower than the existing payments. Some creditors will lower their interest rates, and bring the account current. Most creditors will cease collection activities.
One excellent debt management service is LSS Financial Counseling Service. They provide a variety of financial counseling services in most states in the USA. If they don’t happen to provide service where you live, the NFCC can help you find an accredited service in your area.
Staying out of debt
To stay out of debt, make a personal commitment to spend less than you earn… as a permanent lifestyle choice! Exactly how much less is up to you. Some people don’t realize that by spending less than you earn, you will actually have more money to spend, over the long run. Your assets will grow instead of shrink. You will have more income, less payments, and less financial stress in your life.
What comes next
For most people, paying off oppressive debt takes time, and it means spending less money.
The good news is that once you learn how to do this, you will have a lot more control over your financial life. You will feel a sense of power and accomplishment as you see your debt balances fall.
When you’ve paid off those debts, you will be in a much better position to grow financially. You will be better able to improve your credit, or grow your net worth.
Getting into debt can be stressful. Getting out of debt can be a lot of fun. You have the freedom to choose your perspective… to choose how you look at your situation and your future choices. I suggest you have fun with it!
