A Guide to Managing Personal Debt
Everyone dreams of a debt free life, but most of can’t see past the next paycheck. Once the basics are taken care of there’s not much left, and we still haven’t even paid all of our bills. It’s cyclical and affects about three-quarters of us on a monthly basis. The good news is that there are steps we can take, some admittedly more painful than others, to get ourselves out of the rut of living life paycheck-to-paycheck.
Make a Plan
Draw up a budget and stick to it. This is one of the ‘more painful’ parts of the process, but once you get it down and become accustomed to following it, your dedication to your budget will reap huge rewards for you down the road.
Track literally every cent you spend for two months and transfer all of it to a spreadsheet. There are some great finance and budgeting apps that can help take the pain out of this part of the process.
After the two-month data gathering process, go over your spending with a fine tooth comb and (painfully) budget your spending based on priorities only. Any discretionary spending (lattes, impulse buying) should be eliminated or at least pared down. Those funds can then be channeled into paying down the bills that are keeping you trapped, such as credit card interest and student loans. Here’s an example of just one small change you can make that can net you nearly $500 a year:
Trade your weekly trip to the movies for a weekly Redbox trip instead. One rental is a little over $1, but one regularly priced movie ticket is $10+. Yes, you’ll have to stay home, but you’ll save about $40 a month (before snacks). That’s $480 a year that could go toward credit card debt, car payments or student loans.
Once you’ve drafted your budget, stick to it. That $40 you have now freed up to pay down other bills? Make sure it gets there every month. $40 doesn’t seem like much, and it can feel discouraging, but the power is in following the same routine monthly. With almost $500 a year, you will get your car paid off sooner and you will be paying a lot less credit card interest over time. It can be just that simple. It’s all in how you prioritize your spending.
Consolidate Your Loans
Once you have a realistic budget figured out, get to work on paying off the bills that are holding you back financially. For most young (and some not so young) people, the biggest culprits are college loans and credit card debt.
• Student Loans: The average college debt of those who graduated in 2012 with a bachelor’s degree was $26,500, according to a Forbes report. That’s some pretty formidable debt. But, the payoff can be made a bit easier by consolidating all of your federal student loans into a Federal Direct Consolidation Loan. As with anything, there are definite pros and cons, but it’s worth looking into if you need a lower monthly payment now. Put the money you save to work by paying down other debt that has even higher interest rates attached to it, such as credit card debt or a car loan.
• Credit Cards: Look for a credit card that offers an initial zero percent interest rate as a perk to sign up, and then transfer the balances from your other cards onto it. This will only work if you will be able to pay it all off within the advertised trial period. After that, the rate gets a lot higher, sometimes over 20%. If you can’t pay it all off, look for a card that has a very low interest rate for new cardholders. Some offer a fixed low rate on the balance transfer amount for as long as the balance exists. You can literally save hundreds of dollars in interest alone depending on your initial credit card debt.
If you can work through making a budget and tweaking your spending habits to match your financial goals, you will essentially be practicing debt management. If you feel, however, that you’re way in over your head, NY Legal Help has a great overview for reference on the personal bankruptcy process. Remember, fiscal responsibility is just another muscle. The more you use it the stronger it gets, and the sooner you will reach your goal of financial independence.