Debt: the deep hole that seems so effortless to dig but impossible to climb out from. With every new credit plan comes a barrage of danger for consumers already drowning in bills. It’s a problem that millions of Americans struggle through every day and for many it seems that there is no end in sight. The pile of debt can get so high that it’s hard to find a place to start, which is often times the most difficult step. It’s similar to the people on those “Hoarders” shows, when every room is piled high with junk the task can seem too daunting to even begin. Hours and hours of work hardly make a dent and progress is difficult to achieve. But for those looking at an uphill climb out of debt, there are ways to make those first few steps easier, and more productive.
The first main process on the road to recovery is to recognize and break your bad habits. There is no point in doing the work to get out of debt if you will simply bury yourself back into it in a year. You need to take the time to recognize the spending behaviors that have caused the problem in the first place and work to break them. Take a look at your budget for each month, and make more of an effort to live within it. One way to do this: stop using credit cards. Consumers find it increasingly easy to mindlessly swipe their plastic through every register they see. By limiting yourself to cash or debit accounts you will be more aware of your spending and unable to add to your debt problem in the process. Once you have curbed the problem you are ready to begin your journey.
Step 1: Map it out. It’s important to lay out your debt in front of you so you know what you are working with. The options for these are your choice. Use a spreadsheet or a chart or a series of pictograms or whatever works best for you to understand your debt. Separate each account by balance, rate, minimum payment and the number of payments you have left. This organization allows you to plan out the rest of your steps in order to meet your goals.
Step 2: Budget a payment plan. Once you have all of your debt in front of you, determine how much you can put toward paying off your debt each month. The goal for this amount should be more than all of the minimum payments on your accounts combined. This may require some stricter budgeting throughout the month. Limit your spending wherever you can. Pack a lunch for work instead of eating out, avoid frivolous or impulse purchases, or turn down your heat at home by a few degrees. Small changes can give you the boost you need to start to dig yourself free.
Step 3: Focus on a few accounts at a time. The first two steps have given you a plan on how to become debt free, but step three is where the work begins. Pick two or three debts and pay off as much as you can above the minimum on those each month. This will allow you to begin your ascent. The selection of these few targeted debt accounts shouldn’t be random. There is an easy order to follow when attacking these balances. Pay the one with the lowest balance first. This decision is wise both financially and emotionally as crossing accounts off of your list can simplify your journey and feel super satisfying at the same time. Second, go after the debts with the highest interest rates. Paying these down early will help you nip the problem in the bud and keep your debt balance from rising. Your last goal is to aim for your secured debt that has just a few payments remaining. If you pay above the minimum you can cut out the final payment or last few payments altogether, giving you a lot more freedom in your monthly budget.
The final step is simple: once you have dug yourself out, don’t fall back in. Often times, the freedom associated with people becoming debt free leads to the same habits and behaviors that caused the debt in the first place. If you feel the need to reward yourself, do it with a deposit into a savings account or a contribution into your retirement plan. Keeping yourself debt free and financially stable will be the greatest gift you can grant yourself.
Photo Courtesy of: pcbs.org
Gregory Ricks and Associates 