Getting Out of Debt in 2011

It's the beginning of a new year and many people's thoughts turn towards managing their money better. After the past two years of economic turmoil, rising prices and declining retirement fund balances, it is time to whip our own budgets into shape. Even if you are an accountant like me, there is always room to re-evaluate and tighten up the finances. At the beginning of every year, I sit down and review my prior year spending and budget and set up a new one. Here are the best four ways to get your debt under control in 2011.

Prepare a budget

If you have never set up a budget before, it can seem like an overwhelming task. Fortunately, there are many software programs out there to help you. Intuit's Quicken is my favorite as it will allow you to run reports throughout the year comparing your actual spending to your budget.

If you set up your monthly budget at the beginning of each year, you have a roadmap that guides you in your spending decisions. You will automatically know if you have enough money to buy those new $150 shoes or to take a vacation to a tropical island. Not budgeting is the main cause of increasing debt. You can't control what you don't plan. Be sure to include debt pay down in your budget.

Track every dollar coming and going

A budget is no good without knowing what you are really spending. You may think that only poor people have to track their spending but it might surprise you to know that the rich track every dollar going out and coming in. They know exactly what they are spending and how much they are saving and investing. Keep track of all of your expenses and it will give you a better sense of where that money flies off to every month.

Use credit cards sparingly

In my perfect world, every credit card would be eliminated. Access to easy credit has been one reason for the increase in personal bankruptcies and the staggering jump in personal debt. That little plastic card allows us to live beyond our means; a life we can't afford. However, credit cards are a reality and are an important part of your credit score. Your score will be higher if you have a credit card and use it wisely than if you do not have one at all. Don't carry a balance from month to month and make sure you pay it off every month before the due date. A late credit card payment can damage your credit rating.

If you keep credit cards around "for emergencies", work towards building a savings balance to protect against those emergencies instead.

Renegotiate the mortgage

If you have been able to maintain good credit throughout the past few years, now is a great time to discuss your mortgage with your bank or financial institution. Rates are lower than they have been in decades and your banker may work with you to get you a better rate. Lowering your rate even a half percentage point can save you thousands of dollars over the life of the mortgage. If there are penalties for renegotiation, weigh them against what you will save over all.

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