Frugalnomics

Debt has become a way of life for most Americans, and who can blame us? Credit can be an effective tool in getting a business started, funding emergency repairs, and buying big-ticket items like cars and a house. To get any of these things one must first have credit, which means having used credit in smaller amounts and shown a propensity to pay those small debts off effectively and timely, and, of course, in a manner that made the creditors money.

Debt can also be dangerous, though. Especially in times of global financial strain, debt can add up to the point where people are overwhelmed, depressed, and facing such unsavory possibilities as bankruptcy, becoming homeless, and many other extreme hardships. Millions of Americans are in situations like these, rich and poor, but getting out of debt and back on a fiscal path that leads toward stability and happiness is possible, and can even be enjoyable. Following these steps will get you on your way!

1 – Make the Commitment

Make a commitment to get out of debt. Like any other long-term goal, the beginning of the path out of debt must start with a solemn vow. If you are not committed to erasing debt you will not succeed. You will have to make sacrifices, but you will be much better for the effort in the end. Create a list of specific goals you wish to achieve and mark this commitment with some type of calendar-worthy event to act as a memorable point and keep you motivated.

2 – Don’t Take On New Debt

STOP creating new debt. This step is often the most difficult of all because this is where you cut back on costs, which also means going without many enjoyable things you have become used to having. The focus here is on discontinuing use of credit cards: every other type of debt takes time to gain, and your financial stability is fully evaluated in the process.

The best way to stop using credit cards is obviously to get rid of them. If this simply isn’t possible, or if you wish to keep one card on hand for emergencies, you need to place controls. Take the card out of your wallet and leave it at home, only taking it out for a specific purpose and returning it immediately after that purpose is fulfilled. Develop stringent requirements which determine what type of purposes the card may be used for: emergency household or auto repairs for example.

3 – Understand Your Personal Finances

Fully assess your financial situation. This requires you to be completely honest. It is extremely beneficial to get outside help, even if you have to pay a reasonable fee for that help as with financial advisers and other experts. At a minimum, you need to compile all of your financial obligations, regular and expected expenses, and all of your sources of income with a year-long scope since not all expenses occur monthly.

In assessing your finances the goal is to determine exactly how much money you have and where it is going. Break up all of the expenses into different categories: home expenses (mortgage, repairs, insurance, taxes, etc), auto expenses (monthly payment, insurance, fuel, repairs, etc), food, clothing, entertainment, school, and miscellaneous to name a few. Avoid overusing the miscellaneous category; try to fit as many things into a specific category as possible.

The most basic method is to set up a spreadsheet input each individual expense. Start with all of your net income, adding it all up in a single column. Taxes and other immediate withdrawals from your income will be the first expense column since you don’t usually see those. If all of your taxes are paid at the end of the year make sure you forecast them and save that money.

Home-related expenses will be the next column because it is the most basic necessity. Include all monthly bills, estimating variable expenses like electricity with a slant toward the high end, and estimate future expenses like repairs.

If you rely on vehicles they will be the next expense column. Include all associated costs, again estimating fuel, registration, and repair costs for the entire year.

The rest of the expense columns will depend on your own situation and expenses. What you should end up with is an accurate picture of your money flow. If the amount leaving is more than the amount coming in you need to find ways to cut back in the respective categories. Don’t forget that small expenses are often the largest culprit in overages. Perhaps that $200/month expense in the “miscellaneous” category is actually a daily $5 trip to Starbucks.

4 – Create a Personal Budget

Create a budget. The word budget is taboo with many people, but it is truly the only way to track your progress. With the advent of online bank statements and other useful accounting tools, many people get in the habit living in an “if the money’s there it’s available” system. Remember that there are many expenses that you must plan for or they end up on a high-interest credit card later.

Budgets differ very much in complexity, but the idea is to take all of the information gained in the previous step and create a plan to pay off current debt and prepare for future expenses with the income you have. The best budgets plan for the worst possible scenarios and have flexibility for unforeseen expenses. Don’t forget to treat yourself, too. Leave room for an occasional shopping trip or family activity.

The amount of money you pay toward debt will decide how you pay it. Determine a fixed amount of money that you will use to pay off debt and make sure that amount is greater than the sum of all of your minimum monthly payments. You will spend that same amount of money on debt until all debts are paid.

With that debt money you will pay the minimum on all debts except one, to which you will apply the entirety of the extra amount you set aside. The best thing to do is to start with a small debt. Paying off that small debt will motivate you early on to continue paying off other debts. After that, pay off your debts in order of highest interest rate to lowest.

*Don’t forget to save! You must allocate money toward emergency expenses and save for future purchase goals so you don’t end up with them on credit cards.

Nobody can force you to follow the plan you create, though, so go back to your vows and goals to provide the will to stick to the budget you create.

5 – Track Your Progress

Each month you must balance all of your accounts and match your actual expenses to the planned budget for the month. If there are vast discrepancies fix them. If you have extra money, first determine where it came from to make sure a bill didn’t go unpaid, then put it in savings or pay off a little extra debt.

Once a year set aside a weekend to reevaluate your situation. This can be an enjoyable time, make a small vacation out of it! You will start back at the top of this small guide and do all of the steps over again.

Final Thoughts

Getting out of debt is a huge step in creating a happier and less stressful life. It’s going to be tough at times, but have fun with it and remember that you can get there! Financial stability and freedom is easier than you think!