Are you having a problem managing your debts? So are millions of other Americans. They owe an average of more than $16,000 and given the fact that this is an average you can just imagine how much more some people owe. There are people owing $25,000, $35,000, $50,000 or even more. But the real issue isn’t how much you owe it’s how you’re managing your debts.
Tip #1: Get off the couch
The more you delay repaying those debts the worse it’s going to get. This is thanks to that devil called compound interest. If you’re not familiar with compound interest the free online encyclopedia Wikipedia defines it as “interest added to the principal of a deposit or loan so that the added interest also earns interest from then on. This addition of interest to the principal is called compounding.” A shorter way to put this is any interest that accrues on your loans will be added to their principles so that you end up ultimately paying interest on interest. As an example of this if you have $5000 in credit card debt with a 22% annual interest rate, in 10 years that $5000 balance will grow to $44,235 or about nine times the debt’s face value. So the first important thing is to start doing something about those debts.
Tip #2: Get a plan
It’s practically impossible to manage debt by doing it sort of helter-skelter with no clear plan. As painful as it might be you need to make a list of all your debts with the names of each of your lenders, the interest rate you’re currently paying, your minimum payments and your due dates. Hint: The easiest way to do this is with a spreadsheet program.
Okay, so now you have at least the big picture and it might seem overwhelming. But the secret here is the same as the answer to the question of how do you eat an elephant? Thee answer is a bite at a time. In this case it’s focusing on one debt at and working on it until you’ve paid it off. For example, you might find the debt that has the lowest balance and tackle it first while continuing to make the minimum payments on your other debts. Once you’ve paid off that first debt, you’ll have more money available to begin paying off the debt with the second lowest balance and so on. This is actually called the snowball method for paying off debt and was originated by the financial guru Dave Ramsey.
Tip #3: Get a budget
A third thing you need to do is make a budget so that you will have the maximum amount of money available to pay off those debts. The first step in creating one is to track your spending for three to four weeks, which means writing down everything you spend money on. Step two is to divide your spending into general categories such as food, recreation, eating out, clothing, entertainment, transportation, utilities and so forth. Then put the microscope on each of these categories looking for places where you could make cuts. Your objective should be to reduce your spending by 10%. And, of course, the more’s the better.
Tip #4: Get a credit counseling agency
If you have a problem making a budget or if you just can’t find ways to cut your spending by that 10% you need to find a credit counseling agency to help. There might be one near where you live. If not, it’s easy to find one on the Internet. The important thing is to choose one that’s a nonprofit and either charges nothing or very little for its services.
The credit counseling agency will assign a debt counselor to you. He or she will analyze your finances, review your spending and then help you develop a budget. If it turns out, and it may well, that you simply don’t earn enough to get your debts repaid in a timely fashion your counselor will contact your lenders to see if they would be willing to accept the payments you could afford. He or she may also negotiate with their lenders to get your interest rates reduced. If all of your creditors agree to accept the payments your counselor has negotiated you will then begin paying the credit counseling agency each month instead of your lenders. This is called a debt management plan or DMP and has helped thousands of Americans get their debt under control and paid off.
Tip #5: Get loose
You probably didn’t run up all those debts overnight and you’re not going to be able to repay them overnight. You need to get loose and be patient. Whether you choose the snowball method or a consumer credit counseling agency it’s going to take you several years to get those debts repaid. A consumer credit counseling agency DMP generally takes five years to complete. You may be able to do this in less time if you choose the snowball method but that will depend on how much you owe and how conscientious you are in making your payments. This takes us to…
If you seriously want to get out of debt you need to be consistent and disciplined. Top pro athletes did not get to where they are by working out in fits and starts. They are disciplined and consistent in their workouts. You will need to be the same way. Regardless of which debt repayment program you choose you need to stick with it and make your payments every month without fail. Just keep reminding yourself of your goal, which is to become debt free. The great woman golfer Annika Sörenstam fell asleep every night listening to the sound of a golf ball falling into the cup as motivation to keep winning. You might try falling asleep to the sound of softly moving water as motivation to keep working on those debts until you have a less stressful because you’re totally debt free.