Tips for Getting Out of Debt: Pay it Down
This is simple common sense – to get out of debt, you have to pay your debt down. Many people, however, have no idea how to get started.
Get started by sitting down with all of your bills and figure out how much you owe, and what your interest rates are for each debt. Order your debts from highest interest rate to lowest and start working on paying down the debt that carries the highest interest rate first by putting as much as you can reasonably afford each month towards that debt while paying the minimum on the remainder of your debts. In this manner, you can snowball your payments towards your debt, increasing your payment towards the next debt on the list as you pay each debt off.
It also can’t hurt to contact your creditors and ask that they lower your interest rate or transfer your balance to a card that offers a lower or even 0% APR rate for the life of a balance transfer. If your interest rate is lower, your debt isn’t growing as quickly, you’ll pay it off faster, and you’ll save hundreds or even thousands of dollars in the process.
Tips for Getting Out of Debt: Cut Spending
Once you’ve tracked your expenses, it’s time to get serious about cutting back on your spending in order to free up more money to pay down your debt and get out of debt. If you’re spending a lot of money on eating out, cook at home more often and bring your lunch to work. If you are paying a lot towards your cable, internet, and/or cell phone service, look at bundling your services, or cutting back on your cable package and cell phone plan. Ask yourself if you really need high-speed internet, or if you can make do with a simple plan.
Be creative about how to cut back on your expenses:
- shop sales
- clip coupons
- carpool to save on gas costs
- adjust your thermostat lower in winter and higher in summer to reduce your heating and cooling expenses and/or look into heat reducing film for your windows.
Tips for Getting Out of Debt: Pay Cash
Paying down your debt isn’t going to get you out of debt if you continue to use your credit cards. Until you are out of debt, pay cash. Once you have your debt under control, only charge as much as you can afford to pay off at the end of each month. This actually saves you money because not only will you not be paying interest on your purchases, but you’ll end up buying less. When you’re out of money, that’s it, you’re done buying.
Using your debit check card is a good solution for purchases that require a credit card, but costs you nothing in interest since the money is automatically deducted from your account. Be aware, however, that some merchants use a system called “blocking” for purchases that are initially estimated (i.e., hotels, or gas). If you are near your available balance on your account, blocking may cause you to become overdrawn, resulting in bank overdraft fees.
Tips for Getting Out of Debt: Establish An Emergency Fund
If you want to get out of debt, you want to avoid increasing your debt. Unforeseen expenses happen to everyone. Having an emergency fund available can help you absorb those unforeseen expenses without incurring debt on which you’ll have to pay interest.
The question remains whether to fund your emergency savings account first or start tacking debt first. Opinions differ depending on who you talk to. Ideally, you should do both at the same time, but that’s just not realistic for every family, especially those who are already living on a tight budget.
Consider putting any raises, bonuses, overtime income, or tax refunds into your emergency fund. You’re not counting that money into your monthly budget, so you won’t miss it if you put it into savings.
If it comes to a decision between paying down your debt and funding your emergency savings account, you should concentrate on paying down your debt first. Your monthly payment on your credit cards, and the interest rate being charged, is a sure thing, while you may go for months or even years without encountering an unforeseen expense. Start attacking your debt, and once you’ve got that first debt paid off, take 1/2 of the money you were putting towards that debt and put it into savings, using the other 1/2 to attack the second debt on your list, etc. until you have 3-6 months of expenses in your savings account.
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