Through the years, I have consulted with many clients in all different levels of dealing with or getting rid of debt. Here are some tips I’ve learned.
1. Don’t get into debt. Use cash for purchases and except for your home and car, don’t take on additional debt. If you are in business for yourself, credit cards are great for tracking deductible expenses. Just make sure to pay off the balance each month.
2. Take stock of your liabilities so you know exactly how much you owe. Put them in a spreadsheet, with monthly payments, interest amounts, balances, and a running grand total of all your balances. Update it monthly as you pay off debt, and watch the overall amount go down slowly. It’s motivational.
3. Cut up high-interest credit cards.
4. If your debt is severe, speak to a credit counseling service to help work out a plan, arrange with creditors to freeze interest and accept a revised monthly payment. Using a credit counselor shows up on your credit report and adversely affects your FICO score. It’s not as bad as bankruptcy, but it is coded and lenders can see it.
5. Don’t overpay debt. Leave enough each month to cover your regular expenses, too.
6. Eat at home.
7. Plan for upcoming expenses such as annual taxes so you don’t have to go into debt when they are due. If you can’t, add them into your monthly expenses.
8. Snowball debt. Pay minimums on everything, then attack the highest interest debt with all the extra cash you can assemble. Then move on to the next one.
9. Be on the same page regarding debt as your partner. Competing interests are fatal.
10. Recognize your spending tendencies (and those of your family) and place limits on them.
11. Don’t give up. Getting out of debt takes a drastic change in mindset and behavior. You have to truly want to do this, otherwise you’ll put yourself on a financial diet and then crash and burn and find yourself justifying why you deserve a new iPhone when you have a perfectly good phone and still owe $20,000. But anyone can do it, as long as they really want to.
12. Be realistic. If you started accumulating debt three or four years ago, it will take longer than that to pay it off.
13. Create a budget. Put as much money as you can toward paying down debt, but also set some money aside in an emergency fund. Allow for a little bit of fun. Few of us can live without social/recreational activities for the time it takes to become debt-free.
14. Eliminate. Take a hard look at what’s truly necessary, and be willing to make compromises. Cable TV, satellite radio, and lunches out are not necessities. Run your numbers through a debt calculator twice – once with these perks and once without. You’ll be amazed how much of a difference those extra dollars make.
15. Stop borrowing money. No more credit cards, no more car loans, no more cash advances, no more home equity lines. If you can’t afford to buy with cash, then you can’t afford it. And by the time you’ve saved enough to buy with cash, you may realize you don’t need the item anyway.
16. Track expenses. In a software program like Quicken, categorize expenses and report out how much you spend in each so you can spot problem areas (eating out, clothes, gas). Target those categories for reduction.
17. Downsize. This may force you to get rid of stuff that you’re probably still in debt for, showing you just how little any of it matters.
18. Find your purpose. Is it your children, to start your own business, work from home, free up money so that you can give? Finding motivation beyond the money drives passion. Take a look at the things you value deeply and use those things to determine your spending actions.
19. Dedicate extra cash. When you make extra money from overtime or bonuses, pretend it didn’t even happen. Funnel all new money into debt relief.
20. Think time. Calculate how much you make per hour, regardless of whether you are a business owner, salaried or hourly employee. Apply the time factor to any purchase you make. For example, is that 32-inch flat-screen television worth 10, 20 or 30 hours of your time? Once a dollar amount is replaced with a time factor, spending habits can change overnight.
21. Balance transfers. Be careful transferring credit cardbalances. They attract you with 0 percent for a few months, but then spike it to 18 or 21 percent. And look out for transfer fees. If you are careful, though, these can really help reduce debt.
22. Seek alternatives. Sometimes we spend a lot because we don’t consider alternatives. Is cooking at home as bad as you think? What about 10-year-old cars? Roommates? Cheaper parts of town? Thrift stores? Libraries? Bicycling? Find your biggest expenditures and ask some questions, do some research.
Information in this column is not intended to be specific advice for anyone. You should use the information to help you work with a professional regarding your specific financial goals.
Capt. Mark A. Cline is a chartered senior financial planner. Contact him at +1 954-764-2929 or through www.clinefinancial.net. Comments on this column are welcome at firstname.lastname@example.org.