Toward Debt Free Living

One of the most important benefits of budgeting is working your way toward debt free living. Imagine how wonderful that would feel!

Well, debt free living is entirely possible, even if you feel like you’re drowning in debt right now. I want to be truthful – it won’t be easy. It requires breaking deep-seated habits and establishing new, financially healthy habits instead. But if you’re committed to achieving that goal you can make it happen.

Step One: Be honest about your situation. Make a complete list of everything you owe: how much, amount of each payment, and when it’s scheduled to be paid off. It’s also helpful to include the interest rate you’re paying for the privilege of using that money.

Step Two: If you haven’t already done so, go through the steps I’ve laid out for making a personal budget. This will give you an accurate picture of your monthly income and expenses, and will tell you how much money is available each month to begin paying off your debt. You can start the budgeting process here.

Step Three: Possibly the single most important step toward debt free living is to STOP USING CREDIT CARDS! Build the habit of buying only what you can pay for with cash. If you don’t have the money, you can’t buy the toy. I know this is tough. It’s hard to curb the impulse to have something right now. It’s hard to break an ingrained habit like buying on credit, but you can do it! The main key: think before you buy. Is it essential? Is it part of my budget, or is it extra? Do I have the cash to pay for it?

Replace your spending habit with a thinking habit and you will have taken a huge step in the right direction toward your goal of debt free living.

Step Four: Using the list of credit payments you made in Step 1, put a star next to the three bills with the highest interest rate. Then, put a check mark next to the three largest bills on which you make just a minimum payment each month. (Minimum payments basically take care of just the finance charge and you never make a dent in the actual amount you owe.) Your goal is to begin paying more than the minimum payment on at least one of your bills, and to pay off the highest interest bills first. If you ended up with a bill that got both a star and a check mark, that’s the place to start!

Step Five: When you built your budget, (see Step Two above) how much income was left each month after paying your budgeted expenses? Designate as much of it as you can each month to pay off your bills, one at a time, highest interest rate first. Even $10 per month over the minimum will help chip away at your debt.

Step Six: Make a timeline for paying off your debt to give you a goal to strive toward. Progress may seem slow at first, but you’ll enjoy watching it get faster and eventually snowball. Here’s an example:

Suppose you pay $15 minimum payment on a credit card bill. To begin paying it off, you add $10 to your payment each month. As you chip away at the actual amount you owe, the interest charge will go down, so every month more and more of your $25 payment goes to paying off your debt and less to the interest. It will be slow, but eventually that credit card will be paid off.

Once it is, you now have an extra $25 each month to pay on your next credit card bill. This bill will disappear at a much faster rate than the first one because you’re paying so much more. And when it’s paid off, apply all of that payment to the next bill, and so on until you’ve achieved your goal of debt free living!

If your financial situation does not allow for this step-by-step method of attacking your debt, you may benefit from professional help to get back on track. However, you need to be extremely careful when deciding on a company to help you negotiate your debt. This excellent will help you understand what to look for – and what to look out for – when choosing a credit counselor or debt reduction company.

Once you’ve achieved your goal, don’t go back to your old habits. Keep the credit cards tucked away to use only in an emergency and do your buying with cash. Debt free living should feel so good that you’ll want to keep your life free of debt. If you begin to slip backwards – no worries. You now have the knowledge and the skills to take control of your finances before they get out of hand.

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