For many people, bills pile up so gradually that once they realize how much debt they have they have no idea to get out of it. No matter how high the balances, however, it is possible to decrease your debt until it is manageable or even eliminated.
Start with Assessment
The first step to decreasing your debt is to ascertain exactly how much you owe. This is not, unfortunately, as simple as adding up your bills and any credit card or loan balances. Instead, you must account for the amount of interest, fines and other fees assessed against your debt. This means that you must include the interest rate on your different debts and calculate the balance accordingly.
To accomplish this task, make a list of every charge card you have, including department store cards and gas cards. Write down their current balance and their corresponding interest rate (remember that you may be charged different interest rates for different types of purchases). Also write down the minimum payment due on your current balance, which you can find by checking your most recent statement.
Next, list your regular bills, such as mortgage payments or rent, car loans and utilities. Include any payments for other types of loans also, such as school loans. Include realistic estimates of grocery bills and other necessary expenses, such as those for school supplies, medication, and emergency funds. Don't forget infrequent charges such as car insurance or renewals on other insurance policies.
Add together the total of all of these bills. This is what it costs you to live each month, which you can refer to as your "cost of living."
Subtract this amount from your monthly earnings. The amount left over is your disposable income. This amount is what you can apply to your debt while maintaining your current lifestyle.
Start to Get Out of Debt
Of course, the first and foremost aspect to getting out of debt is to pay what you must each month. It is your disposable income that you can attribute to paying down your debt. Therefore, ensure that you pay the minimum amount owed on each debt every month to avoid incurring extra penalties or charges.
Allocate your disposable income first to the debts with the highest interest rates or balances. By paying these first, you will reduce the overall amount of money you spend on them. As you pay off different credit cards, call the card companies and permanently close your accounts. This will prevent you from spending on those cards in the future, but keep in mind that closing accounts may have a slight damaging effect to your credit score as a result of the drop in available credit.
Other Options for Getting Out of Debt
In lieu of radical budgeting, you can also choose to consolidate your debt or declare bankruptcy. Consolidating your debt can involve a loan or instead assistance from the Consumer Credit Counseling (CCC) agency. The CCC will negotiate the amount of debt you owe, combine it into a single debt and calculate a monthly payment for you to make towards it. This option affects your credit score, but not as severely as if you didn't pay your debt at all.
Bankruptcy is a legal proceeding in which you declare to the court and your creditors that you are unable to pay off your debt. In this situation the court (through a bankruptcy trustee) gathers information about your assets and debts, lists your creditors in order of importance and, subsequently, pays them a little of what they are entitled to. Declaring bankruptcy affects your credit score negatively for seven years, if not longer.
Finding the Extra Money to Pay Off Debt
Finding extra funds to get out of debt can be challenging. Eliminating little things such as eating out, coffee purchases and lottery tickets add up to make one, usually large, amount of additional disposable income. Other potential money-savers can include:
- Raising the deductible on your insurance policies
- Take leftovers for lunch instead of eating out
- Buying generic groceries whenever possible
- Canceling gym memberships
- Turning off lights when not in the room and using lower-wattage bulbs to decrease electric bills
- Not running the dishwasher or washing machine when not full
- Stocking up on non-perishable items (school supplies, canned goods and shampoo) during sales
More drastic steps, such as taking a home equity loan may help, but also increase the amount of debt you have. Compare the interest rate on a home equity line to what you pay on your credit cards to see whether such a loan is really worthwhile.
Living Without Debt
After you've finally rid yourself of debt, the hardest part may be not falling into old spending habits. Once free, continue using the good spending habits you've acquired. Pay credit card balances each month and put off large purchases until you can afford to pay for them in cash. Continue tracking every penny you spend so that you notice immediately when your bad habits begin affect your finances.