If you feel as if you’re drowning in a pool of debt you’re not alone. The average American family now carries $80,000 in debt of which $5232 is in credit card debt. And the average debt per credit card for people that usually carry a balance is $7,494.
The harsh truth is that if you’re carrying $20,000 or more in debt there’s no easy way out. It will take you a fair amount of self-discipline and anywhere from 2 to 3 years to become debt free. One of the best ways to achieve this is through debt management. And here are the A-B-Cs you need to know to get started.
A is always track your spending
There are reasons why you’ve fallen so far into debt and you need to know what they are. To do this you will need to track your spending for at least 30 days. This means writing down every little thing you spent money on up to and including that drive-through latte you got yesterday morning and that magazine you bought on impulse today.
Once you’ve done this you will need to organize your spending into categories. This could include groceries, eating out, clothing, entertainment, those drive-through lattes, transportation, your cell phone bill, student loan payments and so forth.
Now, sit down, take a deep breath and look carefully at those categories. Somewhere in there are the reasons why you’re struggling with debt. It could be that you’re eating out too often, buying too many clothes or spending too much on entertainment. The important thing is to isolate those hotspots or areas that are causing you to pile up debt.
B is for budget
Okay, so now you know those areas where you’re spending too much money. Next, you need to create a budget designed to trim your expenses. Making a budget is not all that complicated. You could do it with a piece of paper and a pencil. Draw a horizontal line across the top of the paper and then a vertical line in the middle down to the bottom. On the left side of that line write down your fixed expenses or those things where you have no leeway, which typically would include insurance, rent or mortgage payment, student loan debt and your auto payment – if applicable. Then on the right side of that line write down all of your discretionary spending using those categories that you’ve created. Review each of those categories with an eye towards where you can make cuts. Your objective is to get your spending down to below your earnings so that you’ll have more money available to begin paying down your debt. For starters, you should try to whittle your spending down by 20%. If you find you can’t do this go for at least 10%.
C is for create a plan
If you’ve gotten this far, good for you. You obviously want to do debt management and get your debts paid off. But wishing won’t make this happen. You need to have a plan. Open a spreadsheet and write down all of your debt – how much you owe each lender, the minimum payment, its due date and interest rate. Now you have a choice to make because there are two popular ways to pay down debt. The first is called snowballing your debt, the second is stacking it. To snowball your debt you would arrange it in order with the debt that has the lowest balance down to the one with the biggest To snowball your debt, you would arrange it in order with the debt that has the lowest balance down to the one with the biggest and then focus all your efforts on paying off the debt with the lowest balance. Paying that off should go fairly quickly and will free up money you can use to begin paying down the debt with the second lowest balance and so on. Of course, you will want to continue making at least the minimum payments on your other debts.
Stacking debt is basically the opposite of snowballing debt because it means organizing your debts with the one that has the highest interest rate down to the one with the lowest and then doing everything you can to pay of the debt with the highest interest rate. The simplest way to think of these two methods is that snowballing will get you out of debt the quickest while stacking will save you the most money
C is also for conscientiousness
Remember how we said it may take you 2 to 3 years to get debt free? This is a period during which you must be conscientious. You need to keep your spending under control, make all of your payments on time every month and heavy up on those payments as much as you can. Here’s an example of what this can mean. Let’s say you owe $10,000 on a credit card at 15% APR and make payments of $300 a month. In this case, it would take you 44 months to pay off the debt and would cost you $3,017.04 in interest. If you were to up that payment by $100 to $400 a month, you would pay it off in 31 months and it would cost you only $2065.31 in interest – a savings of more than $900.
There it is – the A-B-Cs of debt management. Follow them and it’s guaranteed you’ll be debt free some day and just think how good that will feel.
< H2> C is also for conscientiousness
Remember how we set it may take you 2 to 3 years to get debt free. This is a period during which you must be conscientious. You need to keep your spending under control, make all of your payments on time every month and heavy up on those payments as much as you can. Here’s an example of what this can mean. Let’s suppose you owe $10,000 on a credit card at 15% APR and make payments of $300 a month. In this case, it would take you 44 months to pay off the debt and would cost you $3,017.04 in interest. If you were to up that payment by $100-$400 a month, you have it paid off in 31 months and it would cost you only $2065.31 in interest – a savings of more than $900.