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The New Year is here and so are New Year’s resolutions. One of the most popular resolutions for 2010 is to get in shape – financial shape that is. Wwe are kicking off a Financial Resolutions series this week. Join us every Monday in January. We will be tackling your money concerns and offering you tips on how to get ahead in 2010.
Opening the series, is the most requested topic – getting out of debt. Americans carry nearly 1 trillion – that’s right trillion dollars in credit card debt, with the average household owing nearly $9,000. These are staggering statistics. So here are some tips to help get out of debt and avoid becoming a statistic.
Face the Facts
When asked how much they owe, the majority of people with credit card debt underestimate their total debt. They pay the minimum payment of each bill and avoid looking at their total balance or total debt. That’s like driving with no road signs. You have no idea how far or fast you have to drive.
Calendars are on sale now, so buy a large monthly view calendar. Then collect all your credit card bills and input all their info on the calendar. Write when they are due, the minimum payment, total due and interest rate. Now on one easy to read piece of paper you have your entire debt picture. Take a good look at it. How scary is it? How committed are you to getting the balances to zero?
Change Your Behavior
Paying down debt is a process. It is not something you do in a day. To be successful long term, you have to change your habits and behavior. The reason you got into debt is spending. So you have to stop spending and start saving to pay off your debt. Think about it like stopping smoking.
Stop hanging out with spenders – A smoker trying to quit does not hang out with smokers. So if you are trying to stop spending, avoid friends and situations where you will be tempted to spend. That means no cocktails and dinner with the girls every Friday or no three day weekend trip just because you have MLK off. You don’t need to stick a Getting Out of Debt sticker to your forehead. Just tell people that you love spending time with them but your goal for 2010 is to stick to a budget and you have exceeded your entertainment/shopping/vacation budget for the month.
Find a new habit – Many smokers start chewing gum instead of smoking cigarettes. You should find a new habit to substitute other costly ones. Stopping at Starbucks on the way to work because you can’t make good coffee at home? Try McDonald’s, their McCafe’s are cheaper but still good. Love buying books or going to the movies, discover your local library. Honestly, I hadn’t been for nearly a decade and was amazed at the selection and easy at home access to the catalog where I can make reservations for items online. You get the idea. Don’t stop doing something, just find a cheaper or free alternative.
Start Paying it Down
Once you face your debt and start changing your behaviors to preserve more funds to pay down your debt, you are ready to choose a pay off strategy. There really is no right or wrong way to pay off debt. It is a personal choice.
If you are a more logical person, you would opt to pay off the credit card with the highest interest rate first and then work your way down.
If you are a more emotional person, and you need more reinforcement and encouragement, pay off the credit card with the least balance. You will feel that sense of accomplishment and will be energized to continue.
If you need to improve your credit score, pay off the credit card where you are at or near the credit limit. This will help your credit utilization ratio which accounts for a third of your credit score.
Consumer Reports offers a more thorough overview of payoff strategies: http://www.consumerreports.org/cro/money/credit-loan/how-to-pay-down-your-debt/overview/index.htm
Once you get out of debt, you want to avoid any new debt. And the best way to avoid it is to have an emergency fund. Join us again next Monday to learn the importance of an emergency fund and how to set one up.
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