Do you have a plan to get out of debt? Even if you're not struggling to pay your bills, here's why you should reduce that debt ASAP.
Living in debt is called normal in the U.S. Student loans, mortgages and car loans--even revolving credit card debt--are all considered normal. But debt only creates more debt. Being charged interest on money that you spent years ago is not a healthy way to live--financially or emotionally. Try our five tips to get out of debt.
1. Pay off Revolving Credit Card Debt First: If you have savings of more than $1,000, use all but that $1,000 emergency fund to pay off your highest interest credit card first. This tip comes from financial guru Dave Ramsey. Interest rates on your savings accounts are tremendously lower than the interest you're being charged on credit cards. Use that money more wisely and eliminate your debt burden. If you have multiple credit cards, pay the minimum on the lower rate cards while dedicating the largest chunk of money each month to your highest rate card. Once that card is paid off, move down the line to the next highest rate card until they're all paid off. This tip alone can get you on your way to eliminating debt for life.
2. Resist the Points Game: Being drawn into credit cards to gain points for frequent flights, vacations and the like can be dangerous. If you don't have the financial savvy to pay off the debt EVERY month before you're charged interest, don't do it. Stick to cash and debit cards. If you must gain points, do so responsibly and pay off your credit card every month before interest is charged.
3. Pay Cash for Big Purchases: Instead of buying a new car right when you want one, sock away funds in a car fund. If you've recently paid off a car and foresee needing another in a few years, start dedicating the money you're saving from the lack of car payments to a car fund. Pay exactly what you would've paid to the car payment into that fund. In a few years, you'll have collected the funds for the next car and be able to pay cash. This not only benefits you by eliminating potential debt, but dealerships also tend to give bigger discounts to all-cash buyers.
4. Write Out Your Expenses: Start figuring out where your money is going. Write out your expenses in a journal for at least a month. Find and eliminate your biggest money drains. Have a lot of Starbucks charges? Consider investing in a Keurig and refillable K-cups (don't use the toxic plastic cups) instead to reduce that expense. Buying a lot of clothing? Eliminate new clothing while you get your debt under control and consider thrift or consignment stores for future purchases. Spending a lot on household supplies? Start making your own cleaners and home goods. Spending a lot on restaurants? Eat at home more often. Try freezer meals if you think you're too busy to cook each night.
5. Set a Budget and Stick to It: Write out a budget. Ramsey suggests cash in envelopes for each section of your budget. Once each envelope is out of cash, you'll need to wait for the next month to spend more on groceries, business services, etc. If you have the willpower, you can do the same with a program like Mint without using cash. Set up your budgets in Mint and refuse to spend in the category once you've met the budget for that month.
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