5 Steps to Paying Down Your Debt
Paying off your debt may seem overwhelming, but it just takes a little planning and a lot of discipline. Here are 5 steps to help you pay down your debt.
Step 1: Know your debt. Make a list of all non-housing-related debt: car loan, credit cards, retail store credit cards. Next to each write down the monthly payment, the total amount you owe and the interest rate you pay on the card or loan. Total up the debt and monthly payment columns.
Step 2: Create a budget. Next, you need to know what else you are spending your income on. Using your debt list as a start, add your other monthly expenditures: housing, utilities, groceries, gas, memberships, any monthly savings, discretionary spending. Track your spending for a month by writing down what you spend, or by using online banking.
Step 3: Create a pay-off plan. Consider tapping into your savings. (Though you should always keep an emergency fund that can cover three to six months of expenses.) If your savings is earning 5 percent, but your debt is costing you 10 percent in interest, you may be better off using your savings to pay down your debt. If you have equity in your home, you might also consider consolidating your debt with a home equity loan, line of credit, or a cash-out refinance, which will typically have a lower interest rate than credit cards. In addition, the interest you pay may be tax deductible.
Step 4: Curtail your spending. Even if you consolidate your debt with home equity or a consolidation loan, all the financial benefit is wiped out if you continue to rack up more debt. (And you could end up in danger of losing your home.) Cut up your credit cards. (But don’t close them; this can have a negative effect on your credit.) Look for ways to save: take advantage of coupons, sales, and special offers. Pack your lunches rather than eating out.
Step 5: Be disciplined. Once you have a plan, stick to it. You need not deny yourself all pleasure – in fact, you shouldn’t, because that makes it harder to stick to the plan. But be smart about your spending. Resist the urge to splurge, unless you’ve carefully planned. And remember the golden rule of finances: don’t spend more than you make.
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