Do you feel as if you were stuck in debt hell? It’s not a good feeling is it? You’re probably being pestered or even harassed by debt collectors. You may have trouble sleeping nights or feel as if you were developing an ulcer. This is because the stress associated with being seriously in debt can actually cause physical symptoms. If you’d like to get that debt monster off your back, here ‘s a step-by-step plan for doing just that.
Step 1: Organize your debt
If you’ve let your debts get completely out of hand, you may not be able to remember who you owe, how much you owe each lender and when your payments are due. Get a spreadsheet such as Microsoft Excel or Google Docs and get your debts organized. Your left hand column should be a list of all your lenders followed by a column of balances owed. Your third column should be the interest you pay on each debt and your fourth column the day of the month your payments are due. The reason why you want your debts on the spreadsheet is because this will allow you to “sort” the data. For example, you could sort your debts by balances owed or by the interest you pay on each debt. You could choose to sort from least to greatest or greatest to least.
Step 2: Divide your debts into fixed and variable
Next, you need divide your debts into two categories – fixed and variable. Fixed debts are those where you can’t make any changes such as your mortgage payment, student loan debt and auto loan payments . Variable expenses are everything else or those areas such as food, entertainment and clothing where you could decide to make changes.
Step 3: Make a decision
Step 3 is to decide how to attack those variable debts. There are three ways to do this. One is to pay off the debt with the biggest balance first. The second is to first pay off the one that has the highest interest rate. And the third is to first pay off whichever debt would give you the biggest emotional boost.
Step 4: Create a budget
No matter which of these three options you choose, your next step is to create a budget. You will need to track your expenses for a month, making sure you write down every penny you spend. You will then organize your spending into logical categories such as groceries, clothing, insurance, healthcare, transportation and so forth.
Step 5: Find places where you could cut your spending
Now that you know where your money is going, you should be able to find places where you could cut your spending. For example, you might find that with a little work you could reduce your spending on food by 10% or even 20%. You might also be able to reduce the amount that you spend on clothing and entertainment. If you feel there are just no places where you could cut your spending, turn over your budget along with a red pen to a friend or relative and let them take a whack at it. You might be surprised at what they find.
Step 6: Increase your payments
The purpose of creating a budget and slashing your spending is so that you will have more money to apply to your payments to whichever option you chose in step #3. For example, let’s suppose your plan is to pay off the debt with the highest balance first. You should use all the money you save by budgeting and apply it against that debt until you have it completely paid off. This will free up even more money that you could then use to pay off the debt that has the next highest balance and so on. This is called “snowballing” your debts and it has worked successfully for many people.
Step #7: Watch your debts go away
Every time you make a payment or pay off a debt, make sure you adjust your spreadsheet accordingly so you can see your progress. This can be a powerful motivator to help you stay on track until you become totally debt free.