|Stefano Grossi specializes in online marketing through search engine optimization, blogging, public relations, and PPC campaigns. Visit his website here.
If you've taken on more debt than you can handle, don't be discouraged.
You're not alone. Thousands of Americans are in the same boat, with many of them
carrying huge debt loads. It doesn't matter how much money you make. If you
can't live within your means, you become a slave to your creditors. This article
is by no means a comprehensive treatise on financial planning. Nonetheless, what
follows are a few strategies to regain your financial freedom.
Ask Yourself Why?
Money is a powerful force that can destroy you if you let
it. You must learn to master your money instead of letting it master you. If you
don't do this, you'll never get out of debt. I'll say it once more. If you do
not learn to control your spending, you'll never get out of debt. Be brutally
honest with yourself. Examine your internal reasons about why you are in debt.
I'm not referring to financial blows beyond your control, but about the times
when you let the power of money control you.
Here are some questions to consider: Do you buy stuff to mask your own
insecurities? Are you using money as a drug to comfort yourself? Do you feel you
have to compete financially with your friends, coworkers, neighbors, and family
members? Are you trying to impress someone? Your parents? Who is telling you
that you have to live high on the hog? What is it that compels you to buy that
item right now? Why don't you have enough self-control to buy later or never?
These are serious questions which must be answered before you attempt to
control your money with any kind of budget or financial system. Otherwise, it's
like treating cancer with a Band-Aid. You might even consider psychological
counseling for your money difficulties.
Assess the Damage
It is important you be fully aware of how much debt you are actually carrying
no matter how painful it is. Take a sheet of paper, write down the amounts of
all your debts, and total them. Keep this amount fixed in your mind. It has been
said that pain and pleasure are powerful motivators. If the pain of carrying
your debt is acute enough, you will take aggressive measures to change your
Attack Your Debt Right Now
Stop maxing out your credit cards, but DO NOT CLOSE your accounts. The worst
thing you can do is max out your cards, pay them off, and then call the credit
card companies to tell them to close your accounts. Keep card(s) with a low
limit set by you, not the credit card company. Simply call the company, and tell
them to place a limit on your credit.
Pay off your highest interest rate card first, paying a little more than the
minimum. This will shave months off your debt. With your other debts, continue
paying just the minimum. After you finish paying off your highest interest rate
card, move on to the 2nd highest interest rate card. Roll over the amount you
paid each month from your first card to pay off this one. Don't be tempted to
use the money elsewhere! You must stay disciplined. You'll pay off the second
card even more quickly. Continue this strategy until all your debts are paid.
If you find yourself unable to pay your bills, communicate with your
creditors! Be honest, and explain your financial situation. Ask them to reduce
your payments or the interest rate. Tell them you plan to pay off the debt. The
worst thing you can do is not communicate. They may assume you are unwilling to
pay your bills and get nasty.
Apply for a low interest rate credit card and transfer your balances. There
are several excellent sites on the World Wide Web to find low interest rate
A word of caution: Don't get lured into those introductory, low-interest rate
cards which are so popular right now. Read the fine print before you apply. What
they don't tell you is that most of these cards jump back up to a high interest
rate after 4 to 6 months. Then you're back to where you started or even worse!
If you do get a card with a low, introductory rate, have a financial plan about
what to do when the rate and your payments increase so you won't be caught off
If you own your home, you might consider a debt consolidation loan. This kind
of loan is a 2nd mortgage on your property which allows you to consolidate your
debts into one payment. Some loan programs require no equity or appraisal. You
can use this loan to consolidate credit card bills, car payments, or any other
bills. Interest on this loan may be fully tax deductible depending upon your
situation. Consult your tax advisor. As with any home loan, this is a lien on
your property. If you sell your home, you must pay off both your 1st and 2nd
mortgages. In addition, although you may be making lower monthly payments, you
may be paying for a longer time period than if you paid off each individual
Make an appointment to see a Credit Specialist. You may hear varying opinions
on these services, but I will be the first to tell you that they have been
invaluable in my career. Being a professional real estate investor, CREDIT IS
EVERYTHING, and if it wasn't for this company, I may not be where I am today. This
single service I found, while browsing an Atlanta real estate website, raised my
credit score from 630 to 710 in 60 Days.
Now that you've reviewed some of the personal reasons you've found yourself
in debt and taken some drastic measures to attack your debt, it's time to
develop a plan to determine where all your money is going, and develop a healthy
financial strategy. You must be able to account for every penny you spend each
month. Wait! Don't worry. You won't have to cut your spending yet. Here's a
simple method to develop a plan which fits your comfort zone:
Take a sheet of paper, and write "Master Budget" at the top. On one side,
list all your relatively fixed expenses (mortgage/rent, telephone, electric,
water, gas, car, credit card minimums, etc.) I also highly recommend a really
helpful software program that will make your budgeting AUTOMATIC as well as helping you
with expenses, taxes, managing tenants, and more.
Now comes the tough part. You must estimate how much you spend on variable
expenses like food, eating out, entertainment, stuff for the house, school,
clothing, car repair, gasoline, etc. Here's a great way to determine these
expenses: Buy a small notebook. Write a different spending category on the top
of each page. If you come across an item that doesn't fit readily into any one
category, make an executive decision and pick one. "From now on, magazine
subscriptions go in the 'Entertainment' category." Carry this notebook with you
wherever you go. Be very detailed on your categories. For example, one category
might be "Eating Out." Under this heading, write down the date, description, and
the dollar amount for each time you eat out.
4.1.08 - Coffee - $2.00
4.3.08 - Coffee and Donuts - $3.00
4.5.08 - Steak Dinner - $35.87
This format allows you to see exactly where all your money is going. If you
don't know where your money is going, how can you expect to control it?
Track all your expenditures for one month. At month's end, total each
category, and you'll know exactly how much you spend on everything. You may be
shocked to realize how much you spend on little things. For example, if you
spend $2.00 per day on gourmet coffee, you spend $40 per month just on coffee.
Why not buy a nice coffee maker, and make your own, or at least have coffee out
only once or twice a week?
After you've totaled your categories, transfer them and their respective
expense totals to your "Master Budget" sheet of paper.
List your take-home income after taxes on your "Master Budget." You might
want to develop two different budgets based on your two pay periods. Should you
pay the phone bill on the 1st, or would it be better to pay it on the 15th? What
I find is that one pay period usually has a tighter budget than the other
because you have to pay the bigger bills like your mortgage, rent, car payments,
Now the challenge begins. Balance your income and expense categories, so you
stay within your budget. Leave yourself a $100 cushion in your account. Take a
long hard look at your variable expenses and see how you can reduce them. Let's
look at the category of "Entertainment." which may include dinners out, movies,
movie rentals, plays, etc. Let's say you're currently spending $75 per weekend
on eating out and entertainment. That's $300 per month. Why not only spend $100
and take $200 to make a larger payment on one of your high-interest credit card
You'll have to play around with the amounts you set for your variable
expenses categories. You don't want to completely cut out your fun. Otherwise,
you'll give up on your budget completely. Cut back a fair amount, and see how it
feels. Adjust as you go. Ask yourself questions like: Could we sell our home and
buy or even rent a smaller place until we get back on our feet financially?
Should we move to a different area where housing is less expensive? Do I really
need to buy premium gas? Why not wait and rent a movie, instead of paying
$10-$12 to go to the theater? Do I really need all those magazine subscriptions?
Do I really need those movie channels? Could I live without cable TV? Do I
really use my bottled water service? What are some cheaper alternatives? Do I
really need a new dress, suit, purse, jewelry this month? How you answer these
questions all depend on how quickly you want to get out of debt.
By now, your Master Budget should list every category where you money goes.
When you start living out your new budget on your next pay period, take your
notebook and write the individual amount you have allotted for each category at
the top of its own page. Think of each category page as a mini-account log.
Every dollar you spend must be categorized and deducted from its appropriate
category account balance. Remember to carry your notebook with you everywhere.
When you get to zero in one category, you can't spend any more in that area!
However, what you'll find is that you have other categories that have money left
over at the end of your budget period. You can roll these amounts over to
categories you've zeroed out, or better yet, use those extra dollars to hammer
away at your debt. Revisit your master budget and adjust it accordingly.
I hope these tips have encouraged you. Good luck on eliminating debt and
pursuing financial freedom!