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.