6 Steps to Getting a Grip on Your Finances
Are you starting to feel like you cannot handle the mountain of debt that you have? Are the debt collectors calling you day and night? Instead of worrying and wondering what to do, you should use these six easy steps to repay your debt. Even if you feel like you owe more debt than you can ever pay off, these steps can help you get things under control.
1. Knowledge is Power – And ignorance is bliss. Not knowing how much you owe can make you feel better because you do not know how much money you are going to have to pay. Knowing the amount of money that you owe can be very sobering, but it can also serve as a swift kick in the pants. If you know how much you really owe, it might make you think twice about making unnecessary purchases. Do you really need to eat out for lunch everyday? Come’on!
Use your old bills, call your credit card companies, or other lending companies where you own money. You really need to know an exact amount. This gives you a place to start repaying your debt. You need that big picture view to take the first step.
If you have trouble doing this, just picture yourself bankrupt, and it is suddenly easier to add those bills and make those calls.
2. Reassess Your Spending Habits – Once you know how much money you owe and to whom, you should not add any more to that total. For example, while you are paying down your debt, you do not want to make as many frivolous purchases. This means cutting down on eating out, going to the movies, buying clothes etc. Take the time to look at what you have been spending money on over the past few months and take the time to see where you can make some cuts.
I’m not a fan of the following method but I’m a fan of putting barriers in place to curb bad habits. A barrier to excessive spending on your credit card is to cut up your credit card; bury it; or freeze it in peanut butter. Your account will not be affected, and you can still pay your bills, you will just find it harder to make new purchases without the plastic.
I also suggest you enlist the help of family and friends to curb your excess spending. Tell them your plan is to pay off your debt, your family and friends if they have your best interest at heart will hold you accountable. Hell, they might even say stuff like:
3. Start Repaying Your Debt – You need to take a look at your finances, and you need to see how much disposable income that you have. You need to allocate a certain amount of that disposable income to repay your debts every month.
You can do this buy taking your monthly income and subtracting out the necessary expenses (housing, food, gas, utilities, etc), and the disposable income is what is left over. This is what you will use to pay your debts. Make a plan you can stick to, and decide how much money you will pay on the debt each month. Once you have created a debt repayment plan, reward yourself, relax and have some drinks with friend or go have dinner with your family. Just because you are repaying your debt, does not mean that you can never have fun.
You must always budget in the fun stuff. Even serious fitness people have cheat days. Want to know why? Because, they know that eating healthy, working out all the time isn’t enough to keep them happy. They need to just pig out every once in a while. The trick is to do it in moderation. That’s where the fun money account comes into play.
4. Negotiate – Ever felt like you could win “The Apprentice” with your mad negotiating skills? If so, here is your chance to put them to good use. One important step that you can take when creating your debt repayment plan is talking to your credit card companies. Generally, you can work out a deal with the credit card company or the bank so that you can make payments in a way that is easier for you. Many of these lending institutions are interesting in working with you because they’d prefer you to pay them even if the terms change. If you go bankrupt, no one wins.
You’re probably thinking.. hold up.. I can negotiate with creditors before my account goes into collections? Yes you can, but it definitely not easy. Hence, the reference to your mad negotiation skills.
5. How much to pay on your debt – Never pay the minimum payment if you can help it. Even if you pay off a good amount of your debt, do not grow lazy and start paying the minimum. You always want to pay more than the minimum (double it if you can afford it) because you will pay your debts off more quickly, and you will pay less interest overall. If you can continue to pay more than the minimum on your debts, you will be surprised at how quickly you can pay them off.
I really really like the Dave Ramsey snowball method here. I know mathematically it doesn’t make sense, but neither does cutting up your credit cards either. Sometimes, you need the quick wins to keep you motivated on your plan. So, even though the snowball method doesn’t save you the most money over the long run. I suggest you use the snowball method to pay your debt to keep you motivated to continue the good fight.
6. Investing – Many people argue about whether you should pay off your debt first or invest first. I think, it is important to do a little of both. You want to pay off your debt, and you want to save a little money in case of emergencies all while investing.
One method of choosing between investing and paying off your debts is to compare interest rates. For example, if your credit card interest rate is at 13%, and you are interested in a mutual fund with an interest rate of 8%, all you have to do is some simple math. You’ll end up owing more money than you will save if you choose to invest in the mutual fund over paying down your debt. I didn’t even factor in risk or fees!
Matter of fact, forget that last paragraph you don’t need math.. you need answers!
So this is what you do dammit! You will create a 1 month emergency fund, invest up to your 401k match and then you will focus every single last dime except for fun money on debt. Why invest to the 401k match? Well you can’t beat free money.
The steps above will have you debt free, happy and with a little money invested. The key here to to develop good habits and implement a system that will work for the long term. Crash diets never work so don’t use a crash debt diet for your finances!
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Leave a comment specifying the percentage of income you think a person should allocate to fun money while in debt.