On the way home from work the other night, I heard a radio commercial touting a debt reduction system that (supposedly) works like no other. As I drove along, I couldn’t help but chuckle. After all, they made it sound like there’s some sort of silver bullet out there that will magically make your debt disappear — for a fee, of course.
Guess what? There isn’t. That’s the bad news. The good news is that, with a bit of hard work and focus, you can do it on your own. What follows are some tips for making it happen.
Recognize the problem
It may sound trite, but the first step in tackling your debt is to admit that you have a problem. Unless you’re willing to own up to your situation and commit to changing it, you’re going to be in debt for a long, long time. If you’re married, now’s the time to sit down and have a heartfelt talk about money.
Stop taking on new debt
This is a hard one, especially if you’ve become reliant on credit cards for making ends meet, but… If you want to climb our of the hole, you have to stop digging. If you don’t have the money to pay for something, don’t buy it. Period. If you have to cut up your credit cards to make this happen, then do so.
Build up a cushion
If you’re planning on living without credit, then you’ll need to a cushion to handle unexpected expenses — i.e., an emergency fund. Debt reduction experts such as Dave Ramsey recommend $1000 for starters, though this number might vary depending on your circumstances. If you’re single and on your own, you can probably get away with less than someone with a family.
Just remember… As important as your emergency fund is, you shouldn’t overdo it. Build it up, stash it in a local bank or online savings account, and move on. After all, your debts will just keep on growing until you start wiping them out.
Inventory your debts
In the interest of developing an effective debt repayment strategy, you need to know exactly what you’re up against. Develop a detailed list of who you owe, how much you owe them, and the associated payment terms (e.g., minimum payments, interest rates, etc.). Don’t leave anything off.
Ask for help
Call the creditors on your list and ask if there’s any way they can reduce your interest rate. As unlikely as it seems, this strategy actually works. No, they won’t all agree to it, but some will. And the worst they can do is say no.
Reduce your existing debt
There’s been a lot of debate over the best debt reduction strategies. Some say to attack your smallest debts first, whereas others say to focus on those with the highest interest rates. Guess what? How you do it doesn’t really matter. The important thing is to pick a method and get started.
In order to stay current on all of your debts, and thus avoid unnecessary fees, send at least the minimum due to each creditor every month. After that, take whatever money you have left over and attack your #1 target. As your debts begin to melt away, you’ll be able to direct more and more money toward your next target. Lather, rinse, repeat.
Accelerate your payments
If you’ve made it this far, you’re doing great. Now it’s time to ramp things up. Start by ditching any recurring, discretionary expenses, and cut back wherever else you can. Whatever extra savings you realize should be directed toward your debts.
Some additional ideas:
Every little bit helps.
That’s all folks…
So there you have it. A thumbnail sketch of my magical system for getting out of debt. And it’s all yours for the low, low price of… Free.