Strategies for Eliminating Debt by Frank Bruno
No one really intends to get into debt. Sometimes debt is necessary, as most of us don’t have hundreds of thousands of dollars in cash with which to purchase a home or car. Other times, however, debt is a result of mismanaged spending. It is never too soon to embark upon a debt relief program. The sooner you do, the sooner you can get out of debt. Eliminating debt is not an overnight process. It takes time, persistence, and discipline, but the rewards are well worth the effort.
The first step in a debt relief program is to stop using credit immediately. It makes no sense to continue to accumulate debt while trying to eliminate it. It’s like trying to drain a waterlogged boat with a teaspoon. You’ll get rid of some water, but the rate of water coming into the boat is greater than the water coming out.
Do whatever it takes to eliminate credit use, short of closing the account. Cut up the credit cards, bury them, lock them away in a safe deposit box. Some people go as far as to drown them in a zipper sandwich bag and freeze them. That way, if a credit card purchase is necessary, one must wait for the card to “thaw.” By that time, hopefully the need will have subsided. Some financial advisors tell their clients to cash out all of their assets, excluding tax-deferred retirement accounts, to pay off credit card debts. The reasoning is that it doesn’t make sense to yield 6% on your investment if you’re paying out 22% in debt. Consult with your own financial advisor to see if this makes sense in your particular situation.
Second, take inventory of your cash flow, both incoming and outgoing. Add up your net income from all sources. Next, add up your debts, down to the penny. Include your utilities, insurance payments, and other things that might not show up on your credit report. Separate the necessary expenses, such as rent and groceries, from the expendable expenses, such as gym memberships and magazine subscriptions. Some debts might be difficult to classify. Set these aside in a third column.
Subtract your necessary expenses from your income. The leftover amount is your disposable income. See how your disposable income compares to the expendable and borderline expenses columns. You’ll have to start making some tough decisions about which expenses to eliminate. This decision process might take a few days, because it helps if you can sleep on some of these decisions for a night or two. Hopefully, you can eliminate a few hundred dollars’ worth of expendable expenses in order to apply the savings to your credit cards.
Depending on how deep you are in debt, you might need to consider taking on a second job. Newspaper delivery is a popular choice, because it’s only an hour or two each day, the pay is reasonable, and it doesn’t interfere with social hours. Unfortunately, it requires very early mornings, and a disciplined schedule is a must. If you do consider a second job, be careful of schemes and scams. You’ll be vulnerable to fast money offers, and most are a dead end. Worse, such scams can put you deeper into debt.
Next, reduce your debt interest rates. If you have a mortgage, see if refinancing can save you money. If you have high-interest credit cards, consider obtaining a no- or low-interest credit card. Competition is fierce among card issuers for your business, and many will give zero percent interest as a promotional rate, especially for balance transfers. Put all your high interest cards onto the new card. Not only will you save a tremendous amount in interest and finance charges, but you’ll have the convenience of having only one payment to make.
Keep in mind that interest rate reduction often requires high credit scores. A high credit score will allow you to qualify for financing. A high credit score also helps you to qualify for the lowest rates possible. It is advisable to get a copy of your credit report to find out your credit scores. You can make reasonable assumptions as to your chances to obtain lower-interest financing. You can also find out where you can use improvement in your credit report to boost your scores and take your first step to eliminating your debt for good.
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