Are you making minimum payments on your credit card?
Are you taking new credit to pay off old credit?
Are you getting sleepless nights wondering how you can pay up existing debts?
If your answer is “yes” to even one of the above questions, you need to seriously look into getting out of your current debt situation. There are 3 steps to debt elimination:
The reason why people can’t get out of debt is simply because they keep adding to it. Stop financing anything using credit immediately, especially using credit cards to purchase things that you can barely afford. Never buy anything that you don’t have excess funds in your bank account to pay for it. Credit card is the worst form of credit facility available. With 14% to 24% annual interest charged by credit cards, it is not difficult to comprehend why people who have accumulated a sizable amount of debt with their credit cards seemed so difficult to pay off the outstanding balances. Don't bring your credit cards along when you go out if you can’t control credit card usage. Savvy credit card users carry their cards for the convenience of not having to carry too much cash. However, they avoid the exorbitant interest by paying the balance due in full every month.
2. Build an emergency fund
Some may ask: “Why save up before I even pay off my debt?” The logical answer is, if you don’t save for emergencies, you’ll not be able to cope with the unforeseen expenses that could hit anyone. Don't use your credit card as an option for emergencies for reasons I’ve already explained earlier. It is wiser to save cash for times of emergencies instead. Open a savings account solely for your emergency fund. Keep this money liquid, but don’t tie your emergency fund account to a debit card. Ensure that this account is not easily accessible as people tend to be easily tempted to spend the money as the savings grow. Don’t sabotage your saving efforts by spending the money in the emergency fund account on non-essentials (such as wine, restaurant meals, LV handbags or the latest iPad). It would be best if you could ask your bank to automatically transfer a comfortable amount from your earned income to your emergency fund account every month.
I know this may sound like mission impossible, especially so if you’re currently mired in debt. But trust me, you can do it! I recommend building 6 to 8 months’ worth of living expenses as your emergency fund. Once this amount is achieved, proceed to the next step to clear your outstanding debts.
3. Put debt snowball into action
Depending on how big your debt is, this final step could take months or even years. Most financial consultants advise that debts should be paid off from the highest interest rate to the lowest interest rate. While this may sound logical mathematically, using debt snowball method to eliminate debt makes more sense from a psychological point of view. Your morale will be much higher when you see your debts eliminated one by one in the process.
Debt snowball involves the following steps:
1) List down your debts from lowest balance to highest balance.
2) Allocate a minimum payment on all debts except for the one with the lowest balance.
3) Pay all you can afford on the debt with the lowest balance.
4) When that lowest balance debt is gone, the same amount is used to pay the debt with the next lowest balance.
5) Repeat Step 4 until all debts are cleared.
There are other actions that could be implemented while you’re working to improve your money situation. Focus on the fundamental wealth building formula which requires you to spend less than what you earn. See what you can do to increase your income and reduce unnecessary expenses at the same time. Differentiate between "needs" and "wants", then proceed to cut expenses attributed to your "wants".
Getting out of debt is a step-by-step process. Exercise discipline and take one step at a time (no matter how small that step is at the beginning) and you'll eventually get there. Most importantly, don’t procrastinate and start your debt elimination process now!
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