Sunday, September 09, 2007

31 ways to get out of debt

31 ways to get out of debt.

Found a great article at here is what they said along with my comments.

  1. Write down your financial goal. A large goal is not likely to be achieved if you don't write it down. Type it out, print it out in large font, and post it up on your refrigerator. What is your goal? A 50% reduction of your debt? Complete debt elimination in two years? Whatever it is, be specific and write it down, and don't forget it. I think the righting down goals are great, however, you need a good system to determine if you are moving toward your goal or not. I recommend that your develop a simple net worth spread sheet on Excel to track on a monthly basis your assests and liabilities. Your assests are your savings accounts, investments, real property and so on. Your liabilities are all your debts, mortgage, credit cards, lines of credit and so on. Click here for an example.

  2. Create rewards. People who are good at achieving any goal will tell you that rewards are important. Try to give yourself a treat at regular intervals, or little celebrations when a debt is paid off. Let them motivate you to succeed. Unfortunately, a lot of people have dug themselves a big hole by incurring too much debt. It can be a long haul getting out of this situation. When you reach certain milestones it is a good idea to take a break and celebrate. An example of a milestone might be, paying off your department store credit card, closing out the signature line of credit, consolidating all of your credit card debts into a lower rate. After you get to this milestone, go out for a special dinner or buy yourself a reasonably reward. But don't take on more debt during the celebration.

  3. Think positive. This may be one of the most important tips on this list. Positive thinking may sound corny and trite, but trust me, it works. It's actually crucial to debt elimination. If you start letting negative thoughts get into your head, it will cause you to want to give up. And debt elimination is such a long-term goal that it's important that you not give up. When you feel yourself thinking negative thoughts, squash them and replace them with positive thoughts. Thinking positive is great and I highly recommend it, however, you need to also think critically and creatively. Spend time in a constructive manner thinking about how to get out of debt, how can you reduce your overall expenses, where can you cut back and plow more money into the debt elimination? Critical thinkinig is not negative if you are going about it with a problem solving mindset.

  4. Stop digging. As the saying goes, if you're trying to get out of a hole, stop digging. It's important that you stop using your credit cards for spending, and slow down your spending, so that you don't get further into debt. Need to buy something but don't have the money. You'll need to find the money first, or wait until you have it, instead of using credit. This is exactly how you got into this problem. Unfortunately we are in an instant gratification society. A 25 year old couple wants the $500K house and they go out and take on the debt and buy it. Unfotutunately they are over their head immediately and cannot afford to buy window treatments or do any landscaping. You've seen these houses. What happens when one of them looses their job. Our society encourages this type of behavior. We have commercials for equity loans that talk about paying for a vacation with a home equity loan. Does this make any sense.

  5. Make a list of debts. This is a difficult step for many, but necessary. If you're going to tackle your debt problem, you need to know what it looks like. Make a list of all your debts, their minimum monthly payments, interest rates, and total amount owed. A spreadsheet works well for this. Then total up the monthly payments and the total amounts owed to see what the damage is. Now that you have a clear picture of your debts, you can begin to make a plan to conquer them. See my comments above on developing a net worth tracking sheet.

  6. Reduce expenses. See what you can do immediately to reduce your spending, whether it be cutting on things like buying coffee (make your own), eating out (cook at home), or shopping (just stop), or whether it be looking to cut out major bills like a second car payment or your yacht. If you can reduce expenses, even by a couple hundred a month, you can use that money to start paying down your debt. Whatever you free up from your expenses, dedicate that to making an extra debt payment (see the debt snowball below). What about the cable bill ($120 per month), the XM bill, the Netflix bill, and you are still going out to the movies? My dad use to use a very simple system for keeping track of spending, he had a little tiny pocket note book where he wrote down everything he spent. If you do this you will be amazed at what you are spending. Another thing to help you with spending is switch to only buying things with cash. When you see the money flying out of your wallet your begin to realize just how much you are spending. There really isn't any pain in handing someone your Visa and you get a little slip of paper back. It doesn't have the same effect as handing someone 6 $20 bills to pay for the dinner you just had.

  7. Make extra cash. In addition to reducing expenses, you should see if you can bring in some additional income. Work part time, do some freelance work, sell some of your stuff on eBay, hold a garage sale, take in a boarder, rent out your yacht. Get creative. It doesn't have to be permanent, although you might decide to keep bringing in the extra income even after you're out of debt. With the extra income the you generate plow 100% of it into debt elimination first. I also recommend that you start to build up a rainy day fund as well. It may feel crappy working that extra job and giving up your Saturday's but you did spend the money before you earned it and now you are paying it back.

  8. Make a simple budget. This is another step that many people dread. Well, it doesn't have to be complicated. Make a simple list of the things you spend on every month, including your minimum debt payments. Write down how much you spend on each one (and be realistic). Total it up. Then add up your income, and see if the income exceeds the expenses. If not, you'll need to reduce the expenses. I have approached this in a simpler fasion. My income goes into the checking account, if I cannot pay my bills each month from the checking account and I need to tap into savings I immediately know that I am overspending. It is the simple principle of cash flow. If you bring home $3500 a month and your spend $4000 you are either incurring debt or you are tapping into your savings accounts. Your credit union or bank statement should show you this right on top of the statement.

  9. Watch for irregular expenses. Think ahead to expenses that may be coming up, like Christmas and birthdays, or insurance or home repairs or car maintenance or back-to-school shopping. These are things that don't happen every month, but that will definitely be coming up. Budget for them, saving a little so that you are prepared. It's best to include a small amount in your monthly budget for irregular expenses like this, so that you have the money when you need it. The best way to do this is with a special savings account. Lets face it if you have massive credit card debt you are not very disciplined. You are not going to take $20 a month and put it aside to pay for Christmas, vacation, or school tuition. It needs to be automatic. Treat these bills as normal yearly expenses, which are not really irregular since they happen each year and have that amount automatically taken out of your checking account each month and put into a special savings. If you usually spend $2400 on Christmas each year, you need $200 a month going into special savings or your Christmas club savings. If you spend $4800 on that spring vacation, you need $400 a month going into special savings. If your kids tuition is $3600 you need $300 a month for that. You get the idea. Why pay for these things all in one month and incur more debt. Spread it out and save for it all year long.

  10. Save an emergency fund. This tip might seem strange in a list of debt elimination tips, but it's actually very important. Without at least a small emergency fund, you'll have an extremely difficult time reducing your debt. The reason is that when unexpected expenses come up (and they always do), if you have no emergency fund, the first thing you'll cut is your debt elimination payment so that you can pay for the unexpected expense. Either that, or you'll use your credit card and get further into debt. Try to save up $1,000 in a savings account to pay for these unexpected expenses and ensure that your debt elimination goes smoothly. Once you've saved up that $1,000, put it all towards debt. See my comments above about rainy day funds.

  11. Stop using credit cards. Many of us have a problem with credit cards. If you're the type to pay your balance in full each month, and not carry credit card debt, you can skip this tip. If you don't pay your balance in full, cut up your cards or hide them and stop using them. The interest is extremely high, and it's way too easy to use a credit card. Credit cards are a convience and should be treat just as that and only that. Rule #1: Don't borrow money from credit card companies. Credit card companies are not your friends. There are lots of places to find cheaper loans. Credit card companies are not one of them.

  12. Use cash. Instead of putting all your expenses on a card, try using the green stuff instead. Each payday, withdraw the amount of cash needed for your spending expenses in the simple budget you created (see above). Pay your bills online first, then withdraw the cash for groceries, gas, and other spending. When you run out of cash, you're out. It's that simple. This is very similar to the budgeting process that I described about using your checking account. Again it is all about cash flow. In this case it is actual cash flow. When you have flown through all the cash you are done and have to wait until next month.

  13. Use a debt snowball. Popularized by financial adviser Dave Ramsey, the debt snowball is a simple method that works well for many people. First, identify at least $100 that you can use as your "debt snowball". Use this amount to increase your payment on your smallest debt, while paying the minimum on your other debts. Soon, your smallest debt will be paid off. Now take the total amount you were paying on that debt (the "debt snowball" amount plus the minimum payment for that debt), and use it as your debt snowball amount for your next smallest debt. Continue to do that, with your debt snowball amount building up as the debts are paid off, until all debts are paid off. An alternate strategy (and a popular one as well), is paying the highest interest debts first, as this will save you a little money in interest. This strategy can also be applied using one modification. First of all identify the debt that has the highest interest rate. Pay as much as you can on that debt first and the minimum on everything else. Do this with the extra $100 as well. After this debt is paid of attack the next highest debt.

  14. Automate your minimums. Make the minimum payments for each of your debts automatic, so you don't even think about them. Either allow the companies to deduct the amount automatically out of your account, or use your bank's online bill pay feature and make them automatically recurring payments. I don't know that I agree with this tip? Not sure what paying the minimums automatically will do to help you get out of debt. I would have to think about this one.

  15. Make the debt elimination payment a bill. The extra payment you're making on one of your debts (see debt snowball tip above), on top of the minimum payments, should be treated as a bill, not as an optional expense. That means, when you pay your bills, be sure to pay the debt elimination payment along with the rest of the bills. Don't let it be optional at all.

  16. Get lower rates. Either find a balance transfer for your credit cards that will lower your interest rates (read the fine print carefully), or work out a plan with your current credit card companies to lower your rates. Many credit card companies are willing to lower interest rates if you tell them that you will move to a competitor with lower rates.

  17. Monitor impulse spending urges. Impulse spending is the culprit that leads us to get into debt, and often keeps us there despite our desire to get out of debt. Learn to monitor your urges, so that you're aware of them and can control them. Often, when you get the urge to buy something, your heart beats faster and your breathing gets a little heavier. If you can get past these urges, you can control your spending.

  18. Use a 30-day list. A good tool for controlling impulse buys is to use a 30-day list and to stick to it. Every time you get the urge to buy something that isn't absolutely essential (and by "essential" I mean things like groceries, not the latest iGadget), write it on the list with the date you wrote it on the list. Then don't allow yourself to buy it until 30 days have passed. Often, the urge or need to buy that item will have disappeared.

  19. Stop shopping. Don't go to the mall or other usual shopping hangouts. Don't go places to "shop" -- only go to a store if you have something specific to buy (a need, not a want) and don't buy anything else. Get in, then get out.

  20. Don't buy online either. Shopping applies to online shopping sites, such as Amazon or eBay. It's so easy to buy online that many of us do it way too often, and don't realize how much we actually spend. Stay off these sites if possible.

  21. Eat at home. If you tend to eat out a lot, try cooking for yourself instead as much as possible. Make a weekly menu of stuff you like to eat that's not difficult to cook, make a list of the ingredients you need, shop for them, and then cook the simple meals each day. Eating out once in awhile is OK, but if you can make a dent in your dining out spending, you can often free up a lot of cash for debt elimination.

  22. Maintain your focus. One of the hardest things about achieving a long-term goal such as debt elimination is the tendency for our focus on that goal to fade away. Focus is the key to achieving any goal, and to achieve a long-term goal, you have to find ways to maintain that focus. Having a debt-elimination partner, or joining an online forum, is a good way, as is posting your goal or a picture of your goal somewhere visible. Also keep a debt diary or email yourself reminders every so often. Do whatever it takes.

  23. Leave yourself wiggle room. It's unwise to eliminate all extra spending and dedicate it all to debt elimination. That's a recipe for disaster. You have to give yourself some spending money to eat out or buy things now and then (but much less frequently than before), or you will begin to feel deprived and eventually give up.

  24. Brown bag it. If you eat out a lot for lunch, try packing a lunch and eating at work. This can save a lot of money over the course of a month. It requires buying stuff to make for lunch, and a little time in the morning (or the evening before) to pack it, but it's worth the extra effort. Bonus: it's usually healthier too. Ever wonder how we got to the point where goint to lunch costs $11 a person? How did we get to that point. If you don't like to bring your own lunch find cheaper places to buy lunch. Get carryout instead of full service. You don't have to tip and drinks are cheaper.

  25. Find free entertainment. Entertainment is another expense that can greatly hurt your debt elimination efforts. And it's one that you can reduce drastically in most cases. Instead of going out at night, or going to a bar, or going to the movies, or whatever you do for fun that costs money, find ways to have fun for free (or at least for cheap). Staying home and reading or doing fun things at home, or going to the park, or exercising, or spending time with family or friends, can all be a lot of fun without costing a lot of money. Lets face it as I stated before we are an instant gratification society. Another problem is we are never satitisfied. We just want more and more. We come home from a weekend of RVing or a week long vacation and the following weekend my kids are asking me what are we doing this weekend. They are looking for more entertainment. I am feeling taped out and they are ready for the next adventure.

  26. Reduce big expenses. The big expenses, like housing and auto, can often be reduced by a large amount if you examine them carefully and give them some thought. Of course, making a reduction in these expenses isn't as easy as cutting out your morning latte, but they can make such a big difference that it's worth the effort. Housing costs, for example, should be no more than 33 percent of your household income (as a general guideline of course), including mortgage payments, property tax, and both property and homeowner's insurance. Shop around for lower insurance rates, refinance your mortgage, or look for ways to reduce utility costs. If you are house poor and live in an area where you can sell your house, sell it. It is no fun be a slave to your home. You will be amazed at the relief that you will feel by down grading the size of your home and the size of your payment. Make sure you put all the extra cash flow into debt reduction.

  27. Look for bargains. Some people are born bargain hunters, and the rest of us have to learn the skill. Whenever you're going to purchase something, take the time to do the research, find the best prices, look out for sales, even ask for discounts. If you can get bargains on your purchases, you can reduce your expenses by a good amount.
    Look for free or used stuff first. Instead of buying something when you need it, see if you can find someone else who has the item but doesn't need it. Send out an email to friends and family, letting them know what you need. Or look on or If you can't find it for free, try finding a used version of it for cheap, at garage sales, thrift shops, eBay, etc. Two words of advice, buy used. Go to garage sales, if you don't do that find someone who goes to garage sales a lot and tell them what you need. Chances are they will find it at a fraction of the cost like 10 cents on a dollar. Buy used cars as well. You know how it goes, you buy a new and in one year it doesn't look like a new car anymore. Why not start with a nice clean used one that is 10K cheaper than a new one, and in one year you will have a car that looks like a used car.

  28. Debt free? Save, then spend. When your debt is finally paid off, save 60 percent of what you were using to pay debt, and enjoy the other 40 percent. This will allow you to feel the freedom of being debt free while saving for your other goals.
    Educate yourself. If you're going to tackle a problem like debt, it's best to arm yourself with information. Do some research on the web, read "Your Money or Your Life", read Dave Ramsey. Go to the library instead of buying these books, if you are like my wife and like to read paper backs, buy them used. You can get them for $.25 on a garage sale. Your Money or Your Life: Transforming Your Relationship with Money and Achieving Financial Independence

  29. Get creative. Getting what you need and what you want without spending much is an art form. It can be done with a little imagination and creativity. Find new ways to meet your needs without spending a lot. It can actually be a lot of fun.
    Spend 60 percent of your income. A good guideline used by many people is to make your necessary monthly expenses equal only 60 percent of your gross income. For the other 40 percent, divide it among savings, debt payment, and spending.

  30. Be patient. Debt elimination doesn't happen overnight. You didn't get into that debt in a month, and you won't get out of it in a month. For many people, it can take several years. While you may be enthusiastic about eliminating your debt, and want to do it right away, realize that you're in this for the long haul. Now settle in to your new lifestyle, and savor the thought of being free of this debt burden.

  31. Enjoy yourself. If you absolutely hate your new frugal lifestyle, you won't last in it for very long. Learn to enjoy yourself, enjoy finding ways to be frugal, and reward yourself for eliminating debt. You'll be much more likely to stay in it for life.