Tuesday 24 March 2015

Getting Out Of Debt Guide

The current state of the economy has made debt a major issue for a large number of families in the United States and around the world. Getting in was easy, but it’s tough to know where to start when you want out.

Read the description below to see if this 12-step program is suitable for you.

There are many different ways to get out of debt, with each one specific to a person’s individual circumstances. If you have no idea where to start, this program can act as a guide that will help you figure it out. It can then be customized to suit your own personal financial situation.

This is not a program for people that have their finances in check and just need to pay down a couple of credit cards or payday loans. It’s far more suited to those that simply don’t have the extra finances they need to pay down their debt, and who find themselves digging a bigger debt hole with each passing month. Think of it as an emergency program of sorts.


Get-Out-of-Debt Guide

Admit there is a problem. You can’t begin the process of clearing debt until you admit there is a problem. That means owning up to the fact that you have spent money that you didn't have, whilst also acknowledging that you can reverse that behavior and create a plan that will slowly but surely get you out of it. That first step may be the biggest and should be followed by setting aside at least a half hour a week to focus on finances. Try to keep it the same time every week and make sure you always make that appointment.

Stop digging. There is no way you will ever get out of a hole if you continue to dig deeper. This program makes you stop digging in the second week, starting by putting an end to any non-essential spending for a 30 day period. You need to cut up the credit cards that are a problem, or at the very least stop using them for a month, also stay away from short term, high interest loans like payday loans. The essential items where you can spend include bills, housing, gas and groceries. Non-essential items like books, CD’s, DVD’s, clothing, gadgets, etc. are out the window for 30 days. Once that period ends, you can set a budget for those items.

Make small cutbacks. In order to do this, you need to look at regular expenditures and see how you can cut back. That may mean switching to no name brand when you go for groceries, or perhaps making coffee at home rather than dropping $5 per time at the high end coffee shop. Think about packing a lunch to work instead of buying fast food. Take a note of how much these little changes save you per month.

Save for emergencies. When the fourth week of the program arrives, look at starting a savings account. The amount of money you saved from the cutbacks is what should be deposited into that account. Set up your banking so that a regular amount so transferred from your checking to your savings each month. Do this automatically so that you won’t forget or be tempted to skip a month. A small emergency fund is crucial when it comes time to pay off debt, with $1,000 being a good figure to aim for in that account. The reason for doing this is so that you can stay on pace with your debt payments even if something unexpected comes up in the future.

Take inventory. This is one of the more irksome steps in the process, but it is one that is necessary. Think back to Step 1 and how you told yourself you could tackle this problem, In the fifth week you need to set up a basic spreadsheet. One column should list all of your debts (credit card, car loan, medical bills, etc.). It’s okay to omit your mortgage from this list, but nothing else. The second column should have the amount owed on each debt. The third column should show how much is still outstanding on each of those debts, with the fourth column devoted to the percentage interest. Finally, tally up columns two and three to see how much you owe in total, as well as the total minimum payment required each month.

Make a spending plan. This is another step that is sure to be unpopular, but like #5, it’s essential. In the sixth week you need to set up another spreadsheet. The first column in this one will have all of your fixed monthly expenses (car, home, cable, etc.). You then need to move on to variable expenses that are not the same amount every month (gas, groceries, etc.), before adding irregular expenses, which are items like car and home maintenance that may only hot every few months. It’s best to keep everything simple at the start, though. The second column is where you will add the amounts for each item. It’s a good idea to overestimate a little for things like gas and groceries, as you don’t want to be caught short. Don’t forget to include your minimum debt payments and the amount that you transfer into your emergency fund. The next step is to list all of your income sources and how much each provides. That should be more than enough for your temporary spending plan, with the irregular expenses plugged in later. If you find that expenses are more than your income, you’ll need to do some tweaking in order to reverse that.

Get spending under control. By this point you will be 7 weeks into the plan, which mean that you might be having some difficulty keeping track of all you’re spending. It’s important to follow the spending plan, so follow this path: emergency fund deposit first, followed by your debt payments. Monthly payments should be taken care of next. The next step is to withdraw cash and make separate envelopes for each variable payment. That may sound odd, but it’s effective, as overspending is easily averted. When the envelope is out of cash, you can’t spend any more on that variable. If you can, continue to cut back on non-essential spending, as this will make sticking to the spending plan that much easier.

Pay bills on time. It’s often difficult to do, but paying your bills on time is crucial if you really want to get out of debt. The payment plan in Step 7 is designed to help you accomplish this step, as it forces you to pay bills first before looking at discretionary spending. Once you start paying bills on time it tends to become a habit. If you are forgetful and bill payments slip your mind, try using one of these methods: 1. Pay the bill the moment it arrives at your home. Either get to the computer and pay them online, or immediately write a check and send it out the very next day. 2. Take advantage of the calendar program on your computer to email you reminders when the bills are due.

Start a snowball. By this stage of the program you should have your finances under control, which means it’s time for a debt snowball. You should already have a nice emergency fund, know exactly how much you owe, have a temporary spending plan in place, be paying bills on time, and have spending under control. It’s now time to start paying your debt, and here is how to do it:  You can start your debt snowball if you can find $100 or more in your spending plan. That may mean cutting back even further in your discretionary spending.

If your emergency fund is at $1,000 or more, you can use the amount you normally transfer as your debt snowball. If that $100 is not easy to find, you are going to have to find some more items to cut back on until you can get your hands on that amount. Look at all the debts on your spreadsheet and order them from least amount owed to most.

Take the lowest amount and add your $100 debt snowball to the minimum payment amount. For example, if the payment is $50 per month, make it $150. Keep paying that amount until the debt is gone and then apply the debt snowball amount to the next lowest payment. Keep doing that until all the debts are gone, at which point you should have a nice amount left over every month that can be either added to the emergency fund, used for investments, or both.

Find larger cuts. Even when you have your finances under control, you should be looking for ways to increase your debt snowball. The bigger the snowball, the quicker you are out of debt completely. You need to look and see if there are ways to cut back on your larger expenses. That may mean moving into a smaller home or trading your car in for a smaller model that doesn't use as much gas. Any saving that you can make on these bigger ticket items should immediately applied to your debt snowball and not spent on anything else.

Grow your income. Making more money is another great way to get out of debt faster. You might consider taking on a part-time job or asking for a raise at your current position. There are opportunities that you could look into online, which include selling on eBay or even using your talents to do some freelance work. Any money that you do make on the side should automatically be applied to your debt snowball.

Track your progress. Being able to watch your debts shrink is great, so be sure to update your spreadsheet every time that you make a payment towards your debts. This will allow you to calculate exactly how long it should take you to be completely free and clear of all your debts. Don’t become disheartened if it seems a long way off, and instead focus on those shrinking numbers.

Bonus step: Celebrate! 

Don’t save your big celebration for when you are clear of debt. Allow yourself a little celebration every time you eliminate one of your outstanding debts. That doesn't mean that you should spend money on a celebration, but rather find ways to treat yourself with some free entertainment. Getting out of debt is hard work and you deserve a little pat on the back with each accomplishment.

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