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Did you know some experts say there is good debt and bad debt? Good debt is debt used to buy something like a house that will appreciate in value or an automobile that can be used in your job. On the other hand, bad debt is debt that was used to buy an item that will depreciate in value or that has inherent value – like a flat screen TV.
If you have debt that’s spun out of control, there are basically seven ways to deal with it. They are:
• Cut deals with your creditors
• Borrow money to pay off high interest debts
• Consumer credit counseling
• Bankruptcy
• Debt Consolidation
• Balance transfer
• Budgeting
The only “instant” solution
The only way you can get rid of unsecured debts such as credit card debt quickly is by filing for a chapter 7 bankruptcy. You can find lawyers who will handle a bankruptcy for $500 or less and, in most cases, it will get you free from most of your debts in six months or less. Five of the other options won’t eliminate your debts. They’re just ways to move your debts from one set of creditors to another.
Budgeting
The seventh way to manage debt is budgeting. It will take time and some self-discipline but it’s the only way to totally eliminate debt without having to borrow more money and without ruining your credit for 10 years as would happen if your filed for bankruptcy. If you have the right attitude, budgeting can actually feel good as you see yourself getting closer and closer to your goal of becoming debt free.
Getting started
The first step in creating a budget is to determine your current monthly spending and then compare it to your income. You will probably have to track your expenses for a month to learn how much you’re spending in such categories as food, transportation, housing, clothing, utilities, insurance, leisure and entertainment, education and so forth.
Compare this with your monthly income
Step two is to subtract your monthly income from your total spending. This will tell you how much you need to reduce your spending to stop piling up debts and start paying them down. Suppose for example that your monthly income (after withholding) is $2000 but you’ve discovered you’re spending $2,500 a month. In this case you would need to trim your spending to around $1,800 to cover your monthly expenses and have $200 left over to pay down your existing debts.
Where to cut?
Now, go back to your list of monthly spending categories and review each one to see where you might make cuts. There are no hard and fast answers to this but there are “soft” categories where you should be able to reduce your spending. These usually are ones like entertainment, clothing and food. I call them soft because it’s often possible to make cuts in them vs. “hard” categories such as housing, insurance, utilities and etc., which are pretty fixed.
Don’t make yourself crazy
One mistake some people make in creating a budget it so make one so restrictive they go crazy trying to stick with it. You should leave some room for entertainment or for the occasional impulse purchase. If you don’t you could find you’re constantly failing to stay within your budgeted categories and end up just jettisoning the whole thing.
Stick to that budget
Of course, the hard part is sticking to that budget. One good tool that can help is to put everything on a spreadsheet so you can see that you’re staying within your budgeted categories and that, most important, that you’re making good progress on your goal of becoming debt free.
