Lose the Debt Monkey: How to Pay Off Debt for Good!

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Debt seems to be a problem facing most people these days, but it doesn’t have to be.  Follow these steps to get out of debt – FOR GOOD!! 

Commit:  I don’t care what your debt level is, how much you make or how tough your life is, you will never get anywhere unless you commit whole heartedly to the debt payoff process.  This doesn’t just mean to sock away all your pennies to get those balances paid down, it’s about changing your lifestyle to get out of debt and stay out of debt.  Unless you acquired your debts from some freak once in a lifetime incident (I didn’t think so), you got into debt by living beyond your means.  Committing will require you reigning in these impulses and dealing with the consequences.  It may sound harsh, but if you do not commit you can work as hard as anyone at paying things off, but you will never get there or if you do, you will not stay there.

There is no “I” in Team:  Not only do you need to commit to this endeavor, anyone who accumulated this debt with you or is impacted by your financial life needs to be on board.  Whether this be your spouse, partner, brother, roommate, girl in the apartment down the street – they need to commit too.  And this does not mean just being informed, it means being willing to make the same sacrifices to pay down debt and stay out of debt as you.  It will also involve a lot of HONEST communication in which you both (or more) must play with all your cards on the table at all times.  You also must be strong enough to tell each other “NO” when someone strays from the objective.

Accept Your Limitations:  Part of your commitment would be to accept what your limits are in your life.  Maybe you just don’t have the income and lifestyle that supports designer handbags and shoes, or maybe you live in a house/condo/apartment that is beyond your financial capabilities.  You need to know what kind of lifestyle your finances can afford and be happy with that (or get better finances to match your dreams). If you are constantly trying to be better then you can afford, for whatever reason, you will continuously find yourself in debt as you will never be satisfied.  Being able to know your financial limitations, and accept them as your reality, will ensure you stay out of debt and will make you a much happier person.

Line it Up: First and foremost you need to assess your debts with the following information: interest rate, balance, and required minimum payment.  Once you have this compiled rank your debts in the order they will be paid off in a way that makes sense to you.  Financially speaking, ranking debt by highest interest rate to the lowest is the most cost effective, but to keep some people motivated it is sometimes better to look rank differently.

Some people prefer the smallest balance first, as by paying down debts that are small will give them hope to go on.  Kind of like a diet; if you lose 10 pounds right away you are more likely to stick with it then if you lose the same 10 pounds over three months.

Consolidate:  I am not talking about a consolidation loan.  Consolidation loans are for people who have the willpower and drive to pay them off quickly without racking up any new debt.  Once you have completed all of these steps and are comfortable that you are living within your means (at the very least 6 months of following your budget meticulously and making all payments on time), you can do this.  As for right now – don’t even think about it unless you have no choice from the interest.

When I say consolidate I mean try to bring some of your cards or debts together.  Can you use a balance transfer promotion (or just call and ask for one) to put two smaller debts on one card, preferably at a more favorable interest rate.  This way you are not actually opening any new debt, you are just shifting what you have into fewer places so you can work harder at knocking it down, have less payments to make (thus less chance to miss or be late), and as I said, hopefully reduce your average rate of interest that you are paying on your debt.  Re rank debt again after this has been done. 

Cut the Cord: Swear off your credit, or your other sources of debts (ie. parents).  Do not go any further into debt, or you will end up not getting any further ahead. This is where the sacrifices come in. Sure it may be hard not to charge a brand new pair of Jimmy Choo’s, but it’s even harder if you are charging things like groceries or gas.  This is where your budget comes in (see below).

Budget: Create a budget that is realistic, balanced, and all encompassing.  This means that you cannot have more expenses then the money you make (balanced), you cannot just use numbers that balance but do not work such as budgeting $25 for gas in a month unless you drive a Vespa (realistic), and ensure you include a monthly amount for yearly expense that come up like insurance, gifts and taxes (all encompassing).  You should include your debt payments and anything else you spend your money on.  Once the budget is created you cannot deviate from it.  Sure you can spend less on groceries one month just to have a little extra entertainment money, but the month’s expenses in total should never increase unless you have an income increase to back it up.

Pay the Price: Now that you know what you owe, you are not using your credit cards, and you have a workable budget to keep you from going into further debt, it is time to pay up.  Take out your handy dandy debt ranking and ensure you are making at least the minimum payment on every debt.  If, based on your budget you can handle a higher payment, or you come across some extra money place it on the #1 ranked debt. Continue until that is paid off. Take the minimum payment for debt #1 and any extra and add it to the minimum payment on debt #2. Continue on until all debts are paid.

Find More: Your commitment to this step will depend on your debt level and how much it bothers you, but essentially you need to get more money to pay down your debt faster.  This can be through cutting back on your variable expenses (ie. food, gas), by bringing in more income through working more, or by finding money (see Eureka!: How to Find Money in Your Life) Put this money on your debt #1.

Make the Hard Decisions: If your debt is serious, or even if it isn’t, it may be time to make some hard choices about your lifestyle.  Can you get by on a smaller, more fuel efficient car?  Would scaling down your housing (read: moving) help with your debt and still be reasonable for you to live? Are there things that you could give up?  One thing about debt is it can force you to determine what you really can and can’t live without. 

Stay Motivated:  Paying off debt can be a long time affair, but if you are dedicated it will come to an end.  Try to keep yourself motivated and you will eventually get there.  See the article “Debt Destroyer: How to Motivate Yourself to Pay Off Debt” for more ways on keeping motivated. 

Reward Yourself:  Be sure to work rewards into your plan.  It can be as simple as a movie night everytime a debt gets paid off, or a weekend away at the end of your debt journey (not on your credit card), but you need to work these things into your budget to keep you moving. Besides if you made it this far, you deserve it.

Paying off debt is a long process, but it is well worth it.  Stick with a plan and you will get there.

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