If you want to know how difficult it is to effectively manage debt, you don’t need to look any further than the U.S. Federal Government.
For decades we’ve been spending more than we can afford and continually running up our debt by trying to please everyone and making emotional decisions about where and how to spend money when we finally do end up with surpluses. Sound familiar? It shouldn’t surprise anyone that a large portion of the American population is just as bad at balancing our budgets as the people we elect to do it.
The difference is that the federal government is so huge that no one is really going to push them around. Random people aren’t quite so lucky, and if you’ve ever missed a few payments or managed to accumulate a ridiculously high credit card bill, you know just how annoying collection companies can be, and how hard it is to pull yourself out of that hole.
But that doesn’t mean it’s impossible and if you follow these tips consistently, you’ll pull yourself out of debt in no time…or at least minimize the pain.
Budget thoroughly, then follow it religiously.
Budgets are great and all, but they’re only useful insofar as you make yourself stick to them. Exhibit A, once again, is the U.S. government, which constantly comes up with budgets that have “shortfalls.” Basically, that’s a fancy way of saying they’re spending more than they expect to earn.
When you budget, the first thing you need is to do so using real numbers instead of estimates (a site like Mint.com is great for this) so that you’re not regularly spending more than you should without knowing it. Once you have those real numbers, it’s all about willpower and accountability in terms of following your plan.
Identify and eliminate unnecessary expenses.
Sure, you love that cup of Starbucks every day but in a month you’re spending over $100 for coffee that you could just as easily drink at home or at the office. And maybe your cable bill was worth $100 per month before you had a baby, but now that you’re lucky if you get to watch more than a few hours a week, doesn’t it make more sense to just stream Netflix and Hulu ($7.99 per month each)?
Most of us have quite a few things that we could cut out of our lives and still bequite happy. While you’re making that budget mentioned above, keep an eye out for places where you can trim the fat and make cutbacks that will help you to pay off your debt faster.
Pay down debt before you save.
When people find themselves in debt, many times one of the first reactions is to want to save up money so that this kind of thing doesn’t happen again. Generally speaking, saving is a great idea, and something that everyone should start doing. However, if your debt involves any kind of payments with high interest rates (like every single credit card ever), it’s far smarter to pay them down first with every extra penny you have.
Why? Because of that annoying interest.Saving instead of paying it off means that you will actually be losing money even while the amount of money in your savings goes up.
The exception to this rule is if you are in debt due to student loans or a mortgage payment. Because the tax deductions are so generous for those types of debt and the interest rates tend to be relatively low, it makes more sense to slowly chip away at the amount you owe rather than paying it off as fast as possible.
In the end, paying off your debt quickly and effectively largely comes down to being able to curb your impulse to buy and putting any spare money that comes in toward the debt. When you owe money, that tax refund isn’t a reason to go shopping, it’s an excuse to make an extra payment on your credit card that month. Getting out of debt isn’t fun, but the sacrifices you make to get through it are a lot better than having that debt hang over your head even longer.