So, you’re in debt and want to know how the heck to get out of it. First, realize that you are not alone. As of 2014, the average household credit card debt is over $15,000 and student loan is over $33,000. Many people have faced huge bills but stuck to a plan and dug themselves out. It’s not an easy task but these steps can help you can tackle it.
Take a look at where you are today and what debt you’ve accumulated. When I first got out of college I started spending a lot more since it was my first real job. Before things got out of hand I stopped and looked at my spending and what I owed. I realized that things needed to change. Assessing your situation is important because you need to understand your how far you’ve come. At this point you can rank your debt based on amount or interest rate. It will also make you aware the significance.
Next, you will need to do is devise a budget and yes this will suck. You will need to figure out where your money is going. Budgets will allow you to rank each category on importance. Obviously, your mortgage or student loan debt is important to pay and you can’t avoid it. But you might be surprised on how much you spend on clothing, dinning, or going out. My 20s recently left me behind so I realize the importance of going out with friends. It might rank higher than other things and I can’t argue with that but by prioritizing your expenditures you can make some changes. If dinning out is important to you then maybe you cut out your cable or cell phone bill. My wife and I reduced our cable but supplement it with Hulu which saves us $60/month. Our Verizon bill still bugs me and I’m going to give Republic Wireless a try. They have $10 & $25 plans that probably will give me what I need. The game plan here is to figure out what you can/can’t live without but try to find some savings somewhere. Mint.com is a great place to start this process and to track your future spending.
Once you figure out how much money you can save it’s now time to figure out which debt is important to cut off first. There are different rules of thumbs out there. For instance, should you pay off your highest or lowest amounts first? Or should it be the highest interest rate. This is a bit of a physiological question that you need to ask yourself. From a numbers standpoint it would make sense to pay off the highest interest rate first which tends to be the credit card bills. Debt guru Dave Ramsey believes that you should pay off the lowest amounts first. His reasoning is that it feels so good to knock your debt off that it will make you stay committed. Sometimes our debt is so high that we give in and quit. So ask yourself, can you stay committed?
Next, create and rank goals! My wife and I have created different accounts (I like to call them money buckets) for our goals. First bucket is where we pay all of our expenses including retirement. Your first objective would be to pay your expenses and then debt. Next, is our emergency fund and then it is the fun stuff. We put money aside to travel, dinning and going out, etc. Don’t feel like all your money has to go to debt. It is ok every now and then to splurge. It’s like those diets that allow you to eat something sweet because they know you’ll go one a binge if you deprive yourself.
Stop Comparing Yourself
The last step will not be easy. You may look around and see that you’re friends are living it up and you want to keep up. But you have to tell yourself that this is the reason why you’re in debt. If you keep comparing yourself to your friends and family then it will frustrate you to no end. Remember that you have goals and your number one is to be debt free. Grind it out and treat yourself when you knock off one of those debt payments. If you’re on a budget take a look around and see what you can do in your price range. Since living in New Hampshire I’ve found a lot of fun stuff that doesn’t cost a fortune.
You’re not the only one in debt because it is easy to do. You need to assess your situation and devise a game plan. Budgets suck but they can lay out a map to becoming debt free and don’t forget to reward yourself. It’s a long journey and you want to make sure you’ll be up to the challenge from start to finish.