From List Verse
We all want
to get out of debt but it can seem like a long and hard road to financial
freedom. In reality, it is not difficult as long as you follow a few steps and
remain dedicated to the cause. This is a list of ten tips to help you find your
financial freedom.
10. Face Facts
Before
you go any further, you need to sit down and work out exactly what you owe, to
whom you owe it, and what interest rate you are paying. This information will
be very helpful with the rest of these tips. It is very easy to think of all of
our debts as small payments each pay, but when you add them all up they can
amount to a massive debt. This can be a very scary task but unfortunately it
must be done. If you need to, get a friend or family member to sit down with
you to help you go through old bank statements to make sure you miss nothing
out. The good news is that once you have done this, the hard part is over. You
have faced the debt and now it is time to kill it.
9. Stop Spending
Be
satisfied with what you have. For the next few months you are not going to be
able to spend money on treats. It is very important to be able to resist all of
those wonderful things that we all want to have. If you are always wanting to
buy new things, you are going to find it very hard to stick to the tips in this
list and that can lead to failure and, even worse, more debt, unless you can
start being satisfied with what you have. Chances are, shopping is what got you
in to this predicament in the first place, so nip it in the bud now. You
absolutely must stop acquiring new debt.
8. Increase Your Income
While this
is not always possible, you should certainly try to increase your income (even
if by only a small amount). The more money you have to put on debt, the faster
you will eradicate it. You can take a part time job at a supermarket, at a fast
food restaurant, or even just offering to do odd jobs around the neighborhood.
There are a huge variety of part time jobs available in all manner of areas.
7. Pay Yourself
It is
very important that you give yourself enough money to spend each pay cycle. If
you try to skimp in this area, you will break your budget and undo all of the
good work you have achieved. This is not to say that you should not be trying
to reduce expenses, which is also very important. When working out your “play”
money, be sure to include everything you might normally spend money on. If you
leave something off you can put the whole budget out of whack.
6. Stop Saving
Until
you are out of debt, stop saving. In fact, if you have savings put aside, you
should immediately transfer the full amount on to your debts. Your savings
account will be making you far less interest than the money you will save by
reducing debt at high interest. Here is a very basic example:
Savings
@ 5% : $10,000 (Total interest earned in one year: $500)
Credit Card @ 21% :
$10,000 (total cost of debt for one year: $2,100)
By
putting your $10,000 on to your debt, you are saving $2,100 in interest charges
at the expense of $500. It would be utterly foolish to leave your money in the
savings account.
5. Consolidation Loans
Unless
you have managed to get so deeply into debt that you can’t make minimum
payments on all of your loans and cards, you should definitely not get a
consolidation loan. If you are in such a bad state that you simply can’t afford
your debts, a consolidation loan may be the only choice you have short of
bankruptcy. Make sure you shop around and get the lowest rate possible. You
should also try to keep the term down as it will become a part of your debt
budget (item 1) and you want to clear your debts as soon as possible.
4. Reduce Expenses
Frugal
living can be very rewarding. Not only do you save money, but you learn a lot
about survival and taking care of yourself. There are some very simple ways you
can reduce expenses. For example, perhaps you go out on the town twice a week –
reduce it to one night and have the other night in – you can still enjoy
yourself but you won’t be paying bar prices for liquor. If you always buy brand
goods at the market, start buying generic – you can save a lot of money doing this.
You should also consider buying in bulk as bulk buying is almost always
cheaper. Keep your eyes out for good deals and coupons. While this may seem
like a difficult step, you will eventually find that you prefer to live like
this because of the many rewards that come from exercising your brain in
seeking out ways to reduce spending. A very beneficial side-effect to this
(which I have personally experienced) is that you can dramatically reduce the
amount of trash you produce by buying only what you need and buying in bulk.
This can be looked at like a game. When I was following this plan, I found
myself trying every week to reduce the amount of money I was spending. The less
I spent, the better I lived (as a result of home cooking and pride in my efforts).
Do not buy pre-packaged or prepared meals – you are paying a lot of money for
nothing. You should also be aware that certain meats, like chicken, can go up
in price dramatically when you buy skinned and boneless. It does not take much
time to do this yourself.
3. Credit Cards
Credit
cards can be as good a tool to get out of debt as they were to get you into
debt in the first place. If you have a credit card with a low interest rate
that is not maxed out, consider moving a higher interest debt (or as much of it
as you can) to the card. The interest savings may seem low, but every penny
counts.
If you
have maxed your cards out, the first thing you need to do is cut them up. You
will not be using credit cards on this plan (and if you absolutely need one for
important internet purchases, get a pre-paid credit card).
2. Budget
First of
all, this budget will include all of your income and all of your expenses, but,
it will not include any of your debts – they will go on your special debt
budget (see item 1). In this budget you should list your total income, your
total outgoings, and your total surplus. As a part of this budget you should
also include your required spending money (item 7). It is imperative that you
stick to this budget – it is your lifeline. If you are not honest when creating
it, you will find the whole thing collapses within one or two pay cycles.
Include every expense.
1. Make a Debt Budget
This is
different from your regular budget. Your regular budget will tell you how much
money you have left after all other expenses have been paid, the debt budget
will tell you what you owe and how much to pay on each debt.
Transfer
the total surplus from your budget to the debt budget. This is the most
important money you have – it is the money that will give you financial
freedom.
Next you
need to itemize all of your debts in order of highest interest paid to lowest
interest paid. Pay the minimum amount required on all but the highest interest
debt – this is the only time you should be paying minimum payments. Keep doing
this until you remove the high interest debt entirely. Once this is done, put
100% of the money you were spending on that debt to the debt with the next
highest interest; keep doing this until you have paid all of your debts off.
This creates a snowball effect and you will be amazed at how quickly your debt
is reduced. It is one of the best motivators for people working on debt
reduction. You should remember to do this in conjunction with item 3 (transfer
highest interest debts to lowest interest debts where possible).
Once you
have paid all of your debts off, start putting the full amount of your debt
payment money into savings and investments. You were already living without the
money – why not keep doing so and save it for something special.
