Getting and Staying out of Debt

admin | December 26, 2013

The holiday season brings a lot of joy, but it also brings a lot of spending. Many people use their credit cards for the majority of their Christmas shopping, both for themselves and others. If you’re already in a lot of debt though, that may not be an option. This season can really bring on the awareness of how out of control your finances are, because there are so many items that you could and would spend money on if you have it. “Charging” purchases may be tempting, but here are some ways to take control of your debt and not going further in the hole.

Setting a Budget

Everyone knows that they should have a budget, but it can be hard to sit down and make one, because it’s not always easy to know what to record. It is also easy to dread the process of finding out how much money you actually spend. But awareness is an important part of recovery, even in finances.

So sit down and make a list of your streams of income, with how much you make per month. If your income is not consistent, use a baseline estimate. Always round down when it comes to your income. Now you know how much money you have to work with. That wasn’t so hard, was it? Now for the less fun part.

Make a list of your expenses. Start with set bills- rent, car insurance, utilities, phone, loan payments, etc. Then add regular expenses that fluctuate: gas, food, clothing, subscriptions, and entertainment. Always round up when it comes to expenses.

It can be difficult to calculate how much you spend on clothes or food, so you have a couple options on how to get this number. Add up how much you’ve spent on those items each month for the past 2 or 3 months and take an average. You can either use this as your baseline, or you can set a different number that you feel is more appropriate. Maybe you didn’t realize your food expenses add up so high because you eat out a lot. By preparing your own food, you can save a lot of money.

So now you have your income and expenses listed out. The next step is to make a spending plan. If you have extra money, figure out exactly what you want to do with it. You can apply it directly to your debt, or you can save it so that you can make a larger payment off your debt in the future.

A lot of people get tripped up in their budgets because they’re afraid the numbers won’t line up perfectly. They’re right, but this is nothing to be afraid of. This is the reason you underestimate your income and overestimate your expenses. The numbers will not always be exactly what you expect, but by erring on the side of caution, you can be a lot more prepared than if you didn’t track your budget at all.

Hopefully, rounding up and down will result in you having a little unaccounted for money. Don’t let this security tempt you to make impulse purchases. Resolve to put this money toward your debt, so that you can pay off your loans that much faster.

When it comes to paying off debt, there are a lot of different strategies. Everyone is different, so you’ll have to choose the one that you can work with in your debt situation. Here are some options:

Pay off your loans in order of interest rate, largest to smallest. You’ll still have to make the minimum payments on all your loans, but you’ll apply any extra money to paying off the loan with the highest interest. This will result in paying less than if you paid the lowest interest rate first.
Pay the loan with the most emotional attachment first. Debt is hard. Maybe you went into debt for health reasons. Maybe you have a gambling or shopping addiction. Maybe you’re paying off school. If any of your loans have emotional baggage attached, paying off that one can be very motivating, and can get you in the right mindset to pay off the rest of your debts.
Pay off your loans from smallest to largest. Sometimes, simply the number of payments you have to make can be overwhelming. Reduce this as quickly as possible by paying off your smallest debts first, and then funneling the money that would go toward those toward your larger debts.
Consolidate your loans. Now, this won’t work for everybody, but you can often get a lower interest rate by consolidating, with the convenience of one payment. Depending on your credit, you may not qualify for consolidation, or the interest rate may not be worth it, so when seeking debt relief, always read the fine print, and choose the option that makes the most sense for you, not just what any credit company tells you.

Focusing on getting out of debt can not only liberate you from what you currently owe, but it can change your perspective about what’s important. By only spending money on necessities, your definition of necessity changes. You might realize that you prefer to eat at home rather than at restaurants. It is a great time to be frugal, as there are a lot of websites dedicated to budget tips, from making your own house products like dish soap, laundry detergent, and toothpaste, to selling your stuff.

Whether you take on odd jobs or just regulate your current income better, getting out of debt can teach you valuable financial lessons. If you continue to utilize these budget strategies, you can not only get out of debt, but you can stay that way.

Author: Domenic Holme