Tips to Reduce Your Debt

There are many reasons people give for being so far in debt: not knowing the state of their finances; not being able to save money; knowing how much you owe or what interest rate you are paying; missing payments; the list goes on and on. Many are still feeling the pinch of overspending on last year's Christmas gifts. Debt causes endless strife in the family and can raise the blood pressure of almost anyone, and too many turn to bankruptcy as a quick and easy out. To help you get started on the road to less debt, consider the following ideas:

-Keep track of every nickel you spend for a month and record amounts spent in appropriate categories (housing, transportation, food, entertainment, etc.) It doesn't have to be a fancy software program - even just a pencil and a pad of paper will suffice. At the end of the month, analyze where your money is going. Decide if the items purchased are necessities or luxuries. Be realistic. What spending can you eliminate or reduce in order to reach your goal of being debt free? Maybe you can pack your lunch rather than eat out every day, rent a movie rather than run to the cinema, or scale down on your clothing budget. Do last month's clothes REALLY look that outdated?

-Create a list of your debts, mainly the amount you owe and the interest rate. Try to pay more than the minimum payment each month, but more importantly, make a commitment to pay off the debt with the highest interest rate first by making an extra payment. After you've paid that debt, switch the amount you were paying on the old debt to your next debt with the next highest interest rate. Don't try to reduce the total debt payment amount until everything is paid off.

-Along the same lines, get rid of those credit cards. Yes, all of them. When you try to cancel your credit card, the company may offer you an extended line of credit or a lower interest rate, but it's important not to be tempted. They don't care about you or your debt, only your money. If you think you can handle having one, keep a credit card on hand for emergency purposes--just make sure it's a real emergency and not a pair of shoes you can't live without. Pay off that one credit card every month, or else you may get sucked in again.

-Once you have made a record of how you spend your money and have concluded which expenses are necessary, then you are ready to create a spending plan. Start by projecting how much money you will spend in each category for the month, but always be prepared to be a little flexible if an emergency arises. Create a new plan for each month. This is the best way to stay in control of your spending.

-If you absolutely need the convenience of plastic, use a debit card that immediately withdraws money from your checking account. This will help you keep your spending in check when you know you aren't using "free money" to pay for your items.

-Use credit properly, such as when purchasing items that give you some income-producing potential. Contrary to popular belief, there is such a thing as good debt: a mortgage for a home, a loan for an education or the start of a new business. No, money for your new Corvette doesn't count.

-If there's just no way to get around using a credit card, never forget that you WILL be paying the money back, with interest. That $5000 credit limit isn't really your money, you've just been given the opportunity to rack up debt which you will repay the lender. Unless you're paying a mortgage, in general credit payments should never go over 10% of your income.

-Always pay attention to interest rates. Don't finance your car with a credit card if you can get a car loan at a lower interest rate. If your current interest rate on your credit card is 18% and another company is offering you half that, let your credit card company know and ask if they will meet the competitor's rate. If not, don't feel ashamed to take advantage of the other offer. It's worth the time to shop around while you are lowering your debt.

-Save your money. If that wasn't clear enough, SAVE YOUR MONEY. If your credit card with a $400-$500 monthly payment was paid off and you could invest that amount in a savings account, you would invest quite a tidy sum in 10-20 years' time.

-Finally, If you have already started a 401K plan or other savings account, resist the temptation of using your investments to pay off your debt. Take advantage of the good side of interest - the compounding side - and keep your investments on track. The rule of thumb when paying off debts is to think long-term, not short-term advantage.