The following is a guest post from DebtGoal.com's CEO, Scott Crawford.
Getting out of debt is hard work, requiring you to undo many of the habits that got you into debt in the first place. Here are the 7 most important steps that we have developed at DebtGoal.com to help borrowers change their habits and get on a path to paying off their debts.
1. Quit spending on your credit cards
It is very difficult to make progress on your debts if you continue to spend on your credit cards. Studies show that you spend more when you purchase on credit, and the complexity of having multiple spending accounts makes it hard to really know how much you’re spending in a month.
To put your spending on autopilot, we suggest that borrowers create one account into which they deposit a fixed amount of money each month for all discretionary spending, including recurring bills like cable, cell phones, etc. Do a rough budget to determine how much this will need to be each month. Then simply manage your spending to your account balances and set up alerts to notify you of your balances each day. It’s impossible to spend what you don’t have and you’ll find that managing to a balance in this way is much more successful than spending tracking or budgeting programs.
2. Organize your debts
Most people in debt know they have a problem, but most don’t have a good idea how much debt they really have, what it costs them per month, and whether they’re making progress each month or not. The first step in getting out of debt is creating a structure that works for you and gives you visibility to these important trends.
Start by creating a worksheet with each debt, including your mortgage, home equity loans, auto loans, student debt and credit cards. Create columns for balance, APR, minimum payment, new purchases, and payment date. These should all come from your statement. Create an additional column for how much you pay against the account.
It’s easiest to list accounts by the month in which payment is due and you may wish to create a file folder for each calendar month to make it easy to find statements.
Doing this can be tedious, but online tools like DebtGoal.com can automate this process for you.
3. Create a plan
Having a plan is essential to getting out of debt. Choose an amount that you will pay toward debt each month and use a debt stacking approach to maximize your effectiveness. Pay the minimums on every account but your highest-interest account and apply the remainder to this account. Be sure to use your account tracking forms to monitor your progress and stay on-plan.
The math and set up can be daunting, and again programs like DebtGoal.com can help.
4. Tell others about your goal
Telling others about your debt gives them a chance to help you and creates positive peer pressure that can keep you on track. Studies show that people who tell others about their goals are 10-20% more likely to hit their goals, so don’t be shy. You may even find a “debt buddy” who can work on their goal with you and provide a support network.
5. Negotiate lower credit card rates
Over half of borrowers who call their credit card companies to ask for a lower rate are offered a better rate that can be up to 5% lower. It only takes a few minutes to call and ask for a lower rate, but it can save you thousands of dollars in interest and can free up cash that you can use to pay off debt.
6. Don’t confuse motion for progress
In the booming days of debt consolidation and balance transfers, many borrowers felt that they could solve their debt problems by transferring debt to get lower APRs. However, most found that over time their total balances actually went up because these approaches don’t solve the problems that got them into debt in the first place. In fact, they turn into a debt-shifting shell game, making it hard to really know where you stand.
In fact, by making your finances more complicated and giving you a sense of accomplishment, these approaches can actually make it easier to rack up debt in new ways. Keep your finances simple and focus on paying off debt. You’ll find that if you just stick to a plan, you’ll be much better off than by playing the balance transfer shell game.
7. Find additional cash by lowering major expenses
Most of us have heard of the “latte effect” that tells us if we can just cut a bit out of our daily spending we’ll be out of debt before we know it. There’s some truth to that, but most of us spend much more in higher-ticket spending that is actually much easier to cut. Examine your cable bill, cell phone, health club, and other major recurring expenses. Consider moving to housing with a lower rent or trading down a car to a different one with lower payments. Such moves can free up hundreds of dollars per month that can you can use to get out of debt.
Getting out of debt can be difficult, but you can improve your chances of success by following these basic rules that give you a better financial structure.
Scott Crawford is CEO of DebtGoal.com, a do-it-yourself online debt management program that makes it easier to implement and follow basic principles for getting out of debt.
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