Are you worrying about your mounting credit card bills?
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:
1. Don’t get into new debt
The reason why people can’t get out of debt is simply because they keep adding to it. Stop at once! Don't borrow to buy, especially using credit cards to purchase things that you barely can afford. If you don’t have excess funds in your bank account to pay for the thing that you yearn for, then don't buy it. Credit card is the worst form of credit facility available. With 14 - 24% annual interest charged by credit card companies, it's no wonder why people who have accumulated a sizable amount of credit card debts find it hard to pay off the outstanding balances. Don't bring your credit card along when you go out if you can’t control the urge to use it. 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 could be tempted to spend the money as the savings grow. Don’t sabotage your saving efforts by spending your emergency fund on non-essentials such as fine dining, Gucci bags or the latest iPhone. Ask the bank to automatically transfer a comfortable amount from your earned income to your emergency fund account every month. 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 sense from a psychological viewpoint. Your morale will be 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 the lowest balance to the 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 the 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. Believe me, you'll eventually get there.
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