A new year is here so what could be a better time than now to get your debts under control and even paid off. Unless you’re the exception that proves the rule you have no interest in staying in debt. In fact, your debts could be adversely affecting your entire life. The sad fact is that the more debt you have to repay, the less money you have available for today’s expenses and to sock away in a savings account – to cover that rainy day when it comes as rainy days always do.
Tip #1: Revisit your finances.
This means checking the status of all your financial accounts, noting your assets and debts and monthly cash flow so that you’ll know where you stand financially.
Tip #2: Create a budget.
If you haven’t done this recently you need to review all of your spending and then divide it into categories such as housing, healthcare, food, clothing, entertainment and so forth. Then total these up and compare this against your monthly income. If you find you’re spending close to 100% of your monthly income it’s time to revisit those categories to determine where you could make cuts. The simple mathematical fact is that the more you can cut your spending the more money you will have available to repay your debts.
Tip #3: Implement the island strategy
What the island strategy means is to isolate your different financial needs on different financial products. One example of this would be a credit card for everyday purchases that you pay off each month and another that you use for revolving debt. This approach could help you get the best terms for each card. It would also make it easier for you to see your revolving debt and what you would need to do to better manage it.
Tip #4: Automate everything you can
What can ruin your credit faster than anything is missing payments. You can make sure this never happens by automating your recurring monthly payments. This would include your credit card payments, auto loans, personal loans, insurance premiums, and student loans.
Tip #5: Build an emergency fund
One of the best ways to manage debts is by keeping them to the minimum. When you have an emergency fund and you have a serious medical emergency or suddenly find yourself unemployed you’ll have the money available to cover this instead of having to add on more debt. While most experts say you should have the equivalent of six months worth of living expenses in savings try initially for at least three months worth then build from there.
Tip #6: Develop a strategy for getting out of debt
There are basically two approaches to getting out of debt. One is to pay off first the debt with the highest interest rate, as this would save you the most money. The second, which is often called the snowball method, is where you first pay off the debt with the lowest balance. The idea behind this is that this will free up money you can then use to pay off the debt was the second lowest balance and so on. Whichever of these you choose, don’t forget to continue making the minimum monthly payments on all of your other debts.
Tip #7: Work on your credit score
If you have a bad credit history there is not much you can do about it. After all, history is history. But there are several other components to your credit score where you could do some good. For example, your credit usage or debt-to-credit ratio makes up 30% of your credit score. You could improve it by either paying down some of your debts or by getting an increase in your credit limits. A second component you might want to pay attention to is your credit history. As you might guess the longer your credit history, the better. This means it would be a bad idea to close that old credit card you’ve had for many years just because you are no longer using it.
Tip #8: Do your taxes early
If you get organized and file your income taxes early you will not only get your refund faster but you’ll also avoid expensive mistakes you could make if you wait until the last minute and have to hurry through the process. You could make filing your taxes almost drop-dead simple with a program such as TurboTax or by paying a professional to do the taxes for you. A tax service such as H&R Block might cost you $200 or $300 but that could be a very cheap investment versus making a mistake involving several thousand dollars.
Tip #9: Watch for identity theft
It seems there’s a report almost every month about another “data breach” or some massive identity theft. It’s important that you protect your financial identity to prevent fraud, which could add to your debt problem. It is true that the banks cover most financial losses but they will do nothing to repair your credit or to get your money back. You can minimize the risks of identity theft by shredding sensitive documents before tossing them and locking your mailbox when you’re out of town. Also be sure to check your credit reports every several months to see if there have been false charges made or accounts opened. If you spot one or more of these, be sure to alert your banks and dispute the charges with the appropriate credit bureau.
Tip #10: Work to increase your savings by a 15%.
One thing you could do that would help with this is to create separate savings accounts for retirement, college, vacations and so forth. Set a goal for each of these so that you can see how you’re doing towards achieving it. It’s also a good idea to divide those accounts by short- and long-term goals so that you can see you’re making progress towards achieving a long-term goal such as retirement while still being able to enjoy a two-week vacation at the beach.
Tip #11: Give your finances a stress test
Sit down and try to imagine what would be your worst-case scenario – whether it’s losing your job or a parent suddenly needs to go to a nursing home. Then determine whether or not you could survive this. If not, you need to start sticking more money away in your emergency fund until you would be able to pass this test.