Debt Elimination Plan: How Can I Get Out of Debt?
Posted on | May 13, 2009 | No Comments
When you ask how to get out of debt, the first thing you need to realize that there is a way out, regardless of seriousness of your problems. Up to this point, you have been spiraling in the wrong direction. As you spiral, you accelerate. The plan is to put on the brakes and slowly start spiraling in the right direction.
Get Out Of Debt Now: How Can I Pay Off Debt?
Here are some steps you can take:
- Don’t wait to act. Decide right now that you are going to pay off (not pay down) every debt you owe. Period.
- Stop buying items using credit. Quit carrying any credit card at all. In the age of cell phones and Western Union, you do not need it for emergencies. If you are traveling, take a credit card without a balance and a small limit.
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Figure out how much you owe. Often people want to avoid this step because of they potential for pain. Every person that I have counseled felt better, and had a greater sense of control, when they figured out exactly how much they owed and to whom.
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Create a debt elimination plan. You can organize your debts by interest rate, monthly payment or balance. From a purely financial standpoint, you should pay off the debts with the highest interest rate first. From a psychological standpoint, you should pay off the debt with the lowest balance first. If you are really strapped for cashflow, then pay off the debt with the highest monthly payment.
- Contact your creditors. Explain that you want to pay off your debts and ask if they can work with you and take smaller payments now. Explain to them that if they will not work with you, you might have to declare bankruptcy to ensure all of your creditors get paid.
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Create Your Dream Budget. This first budget should reflect where you want to be when you have successfully completed your plan. I use the 10-20-70 method.
- 10% is automatically saved in an emergency account
- 20% is the maximum allowed for consumptive debt (this excludes your house payment if you own a house and one car payment). It includes all charge cards, student loans, a second car payment and anything else you owe money on.
- 70% is your living expenses. This includes your house or rent payment, one car payment and all of your other monthly expenses.
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Create Your Actual Budget. Divide your expenses into the same three categories and add up each one. Divide that by your take home pay and see where your money is going now.
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Commit To Move Toward Your Ideal Budget. For instance, if you find that you are not saving anything, begin to save at least a dollar a day.
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Cut Out Parasitic Expenses. You can eliminate the cable or the $5.00 cup of coffee. You can eliminate eating out. You can brown bag your lunch. Commit to stay home at least two weekends a month. The average person spends $100 per weekend. Check your bank statement to get a handle on all of those automatic drafts. If you have unnecessary subscriptions that go to a credit card, cancel the card and let the subscriptions expire.
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Ebay Or Garage Sale. Get rid of items you do not use, especially toys that cost money to maintain. Honestly, I would really like to see you save the money you make by selling your junk. This becomes the seed for your emergency fund. Having such a fund will make it easier to handle emergencies without going deeper into debt.
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Sell Secured Assets. If you own a new car that has a lien, you may be better off selling the car, paying off the lien and purchasing a used car for a lot less money.
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Increase Your Income. You can get a second job, or work overtime, to earn additional money. APPLY ALL OF THAT EXTRA MONEY TO THE DEBTS
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Use The “Debt Snowball”. Once you have eliminated one debt, take that payment and apply it to the next debt, so now you are paying more on the second debt. This is called the “debt snowball.”
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Consolidate Your Loans. But only do this if you can shift multiple higher rate debts into fewer (or one) lower-rate loan. Do not fall for the teaser rate trap.
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Keep One Card. Store it with a friend or in a safe deposit box. Do not carry it around with you unless you are travleing. InCut up the other cards and call the companies to cancel the accounts even if you have a balance. Card companies will let you close the account and continue paying on the balance. You just will not be able to charge more.
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Contact a Nonprofit Consumer Credit Counseling Agency. Groups such as the National Foundation for Credit Counseling (1-800-388-2227). Groups such as this can help you restructure your debt payments so it’s easier to pay them off.
By taking action to create a sound debt elimination plan, you will be well on your way to pay off your debts now.
Related posts:
- Need To Pay Off Debt? Six Steps for Getting Out of Debt
- Get Out Of Debt With These Debt Consolidation Options
- Destroy That Outstanding Balance With a Credit Card Debt Settlement
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