Getting Out of Debt in Six Easy Steps

If you have debt, you are not alone. It is estimated by the Federal Reserve that 40% of Americans spend more than they earn. Approximately 185 million Americans have at least one credit card, and the average credit card debt totals $8,400 per person. The average credit card interest rate is over 18%, which means that the $8,400 debt takes more than 20 years to pay off at minimum payments, with a total cost nearing $25,000. Ridding yourself of significant debt is a long term commitment to a change in your spending habits, but not necessarily your lifestyle.

Step One: Know where you stand.

In order to fix your money managment, you need to know what's wrong with it. Can you tell someone, off the top of your head, how much money you spend every month? Probably not, so keep a journal of every cent you spend for at least one month. A small pocket sized notebook will be sufficient, or most PDA's have expense tracking programs. Be honest and consistent, omitting or forgetting expenditures won't help you fix your spending problems. Include credit card expenditures in your journal. Using this journal along with all sources of income to develop a monthly balance sheet will show you where you stand. If you are in the red, then you know you've got some work to do. Even if you don't spend more than you make, you likely have a bit of work to do as well.

Step Two: Develop a budget.

Using all the information gathered in step one, you can now come up with a plan. Start with a list of all absolutely mandatory expenditures (mortgage, rent, car payment, utilities, etc). This should give you an idea of how much disposable income remains to you. Now comes the tough part, thinning out your recreational spending. For some it is clothing, for others it's going out to eat several times a week. Whatever it is for you, it needs to be reduced.

Step Three: Curb your spending.

Remember this is a long term commitment. Small steps will work, but you must continually reduce your spending from month to month. Set a monthly goal for less spending, but make it realistic. It won't do you any good to fail to meet your goals. It will only discourage you. How many credit cards do you have? Well, now you have one. Destroy the rest. Keep one for emergencies. Baby steps won't work here. This is cold turkey territory. A quitting smoker who carries around a pack of cigarettes will never quit. You will never get rid of all that debt if you have easy access to money that's not yours. Making it past step three is the key. If you can get rid of all those extra credit lines you've got it easy.

Step Four: Where do you stand now?

Much like in the first step, you need to analyze your spending. Continue to keep your expenditure journal throughout the changes you are making to your spending habits. You should see some progress. Depending on your situation and determination you may see a significant change in leftover income very quickly. Steps three and four should be a continuing process.

Step Five: It's time to tackle some of that debt.

In this step you have a few options, and they really depend on your personal situation. Though it may seem counterproductive, a loan may be your best option. Consolidation of multiple credit card debts into one loan of a significantly lower interest rate can greatly ease the monthly financial burden on your budget. An obstacle to this method could be your current credit rating, but many banks are willing to work with you, at possibly a slightly higher interest rate, if you agree to cancel all but one of your open credit accounts. Debt consolidation is very effective for those with a significant amount of credit card debt, and it will greatly reduce the long term cost from interest.

Another method could be to take your newfound disposable income and put it to work paying off your debts. Pay off one debt at a time, starting with those with the highest rates. Maximize your payment on this one item until it is paid in full, while continuing to make minimum payments on all other debts. Now you can take that extra money and the payment for the first debt and pay off the next item. As you can see, the more you reduce your existing debt, the faster you pay off the remaining loans or cards. Soon, all of those debts are gone, and you've developed a spending mindset that will allow you to actually save money.

There are many debt counseling organizations out there who can help you in negotiations with creditors. Credit card companies are known for working with people who have large balances, and are usually willing to lower interest rates if you are willing to work with them to pay the debt. These debt counselors have practice and connections that make it simpler to go through them. If you decide to use a counselor of some kind, ensure they are a reputable one. You can find several at the National Foundation for Credit Counseling.

Step Six: Remain vigilant.

The hardest step of them all is staying on track. You've had years of training for being a spender. It's ingrained into our society. Every commercial break is full of spend-now propaganda. Spending itself is not a terrible thing. Much of the time it is a necessity. Spending intelligently is the key. Rarely will you ever need to purchase something right now, particularly "non-essential" items. Plan your spending. If you want a new television, spend 6 months saving for it. There's no need to finance the entire price. Perhaps there's a 0% for one year finance deal on it. Great, just make sure it is paid off in that year. Before long you have "stuff," a decent sized savings account, and best of all, minimal debt.

Six Easy Steps, right? Well, they're harder than they might look on paper, but getting out from under all those creditors' thumbs is well worth it. There are entire sections at the bookstore devoted to the topic, but ultimately it comes down to your willingness and ability to change. If you don't think you can do it alone, by all means get help. Those debt counselors usually get paid by creditors for their work, costing you nothing. Use them. More money, less debt, and less stress...it is worth the effort.