3 Important Tips to Get Out of Debt

In this day and age, it only takes a few financial missteps and many consumers can find themselves in trouble. The one factor that exacerbates this is debt, or, to be more precise, overwhelming debt.

For some consumers, getting out of debt simply means tightening the household budget and being more stringent on new purchases. For others, the challenge of getting out of debt can be more daunting. In either case, the best self-help plan for relieving debt is planning and discipline.

Here are 3 important tips to be practiced for getting out of debt.

• #1 : Stop increasing your debt.

If you have any credit cards that are maxed out, cut them in half. If you have more than one remaining credit card, cut them up. When you finish, you should have no more than one credit card. Also cut up any “convenience” cards, such as gas cards, department store cards, etc. You will use your one credit card ONLY to buy “must haves” (see below) until you can get your spending fully under control.

• #2 : Record your spending.

The idea of writing down what you spend is a concept most people find annoying at best and useless at worst. However, this is actually your key to getting out of debt. You’re in debt because you spent money you didn’t have. If you’re like many people, your debt didn’t come from one single huge purchase; it was trickles of spending amassed over time. Avoiding more debt starts with knowing what you are spending your money on. Each day for one month (at least), write down every penny you spend, no matter how small.

• #3 : Categorize your spending.

Categorize your monthly expenses into logical groups of “Must have,” “Should have,” and “Like to have.” “Must haves” are things that will cause harm if you don’t buy them, such as food, rent, medicine, pet food, etc. “Should haves” are things that you need, but can do without for a little while, e.g., new clothes for work, gym membership, etc. “Like to haves” are things that you don’t need, but enhance your life, e.g., magazine subscriptions, newspaper, cable tv, weekly coffee with friends, IM on your phone, etc. By doing this, you’ll have a good idea of what you spend your money on, and you’ll be able to figure out where you might need to cut back on spending. You don’t want to eliminate all of the “should haves” and the “like to haves,” but take a look at those first. One of your expenses will be paying off your debt. You will want to always pay more than the minimum required, otherwise it will take a really long time to eliminate your debt. For example, a single credit card with just a $1,000 balance and 19% interest will take about FIVE YEARS to pay off by making only the minimum payment of $26. Paying the minimum, you will spend $1556.40, with the Total Interest Paid: $556.40! Paying only the minimum payment will equate to giving them 55% more than you actually borrowed.