How to Get Out of Debt and Stay Out of Debt

Interest expenses on large amounts of debt are likely to subtract thousands of dollars away from your bottom line each year. For relief, it is critical for you to put together a solid debt management plan. An effective debt management plan begins with goal setting, which will motivate you to stay the course. From there, you will perform an analysis of your personal finances in order to locate cash that can be spent to make strategic debt payments.

Goal Setting

Financial goals provide a sense of purpose for your debt management plan. Common financial goals include saving up enough cash to provide for a first-time home purchase, four-year college tuition, or a retirement lifestyle. You will categorize your financial goals further in terms of total costs and time frame. For example, you may need to save up $1 million for a comfortable Florida retirement within the next twenty years. Your financial goals, however, are not likely to materialize if you cannot get out of and stay out of debt.

Order Credit Report

You will order a copy of your credit report as part of your debt management plan. As part of the Fair Credit Reporting Act, you are entitled to one free credit report per year through AnnualCreditReport.com. At any time, you can also purchase a copy of your credit report from Experian, TransUnion, or Equifax. The credit report will help you to organize your debts according to type, size, and lender. You should also verify that the information on the report is indeed accurate. Each credit-reporting agency does provide online resources that help you to file disputes.

Debt Refinancing

After receiving your credit report, you will contact each of your individual lenders and attempt to negotiate lower interest rates. Lenders will be more likely to offer lower rates, if you have demonstrated a good history of making timely payments. If the lenders refuse to offer lower rates, you may consider debt refinancing as means to lower carrying costs. With refinancing, you will take out a new loan and use the cash proceeds to pay off old debt. For larger balances, such as a mortgage refinancing, you will weigh the benefits of long-term interest savings against up-front closing costs. A mortgage refinancing is likely to add value, if you can lower your rate by more than one percent and plan to own your home for at least the next ten years.

Analyze Personal Finances

You will analyze your personal finances to locate cash resources that may be spent for paying off debt. If you are struggling with debt, you should sell off under performing investments to raise cash for making payments. For example, you should liquidate a $10,000 bond fund that only generates a 3-percent return, if you are sitting on top of $10,000 worth of credit card debt that charges 18-percent interest. To increase cash flow, you should also eliminate discretionary spending from your budget. Discretionary spending is associated with consumer items, such as, designer jeans and vacation packages that do not add value to your bottom line. Psychologically, it is critical that you differentiate between needs and wants to save money and get out of debt.

Strategic Payments

You will make strategic debt payments according to interest rates. Your goal is to preserve cash for paying off your most expensive debt, first. To do so, you will make minimum payments on all debt balances, except the balance that features the highest interest rate. Once your most expensive debt is paid off, you will then prioritize making payments on the loan with the next highest interest rate.

How to Get Out of Debt and Stay Out of Debt, Sources:

Fair Trade Commission: Knee Deep in Debt

AnnualCreditReport.com: Frequently Asked Questions

Australian Government: Controlling Your Debts

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