The
Path to Financial Freedom:
Simple Debt Elimination Strategies
by
Eric Darby
Copyright 1997, Unicor Funding, Inc. All rights reserved.
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 behavior.
Attack Your
Debt Right Now
- Tear up your credit
cards. Literally take a pair of scissors and cut them up.
Call the credit card companies and tell them to close
your accounts. You might keep one card 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 credit cards. Check out
http://www.bankrate.com and http://www.primerate.com. 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 guard.
- 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 debt.
- Make an appointment to
see a credit counselor. You should be able to find a free
service in your area that will help negotiate payments
with your creditors, and give you good financial advice.
Check your Yellow Pages under Credit Counseling. They’ll
give you a fresh perspective on your financial burden,
and help you realize you’re not the only one dealing
with debt. They’ll also be candid with you and tell
you whether or not you should consider bankruptcy as an
option. Note: I have heard from people who have had both
good and bad experiences with this approach, so be
careful. Ask the company you contact what happens to your
credit if you use their services. Is it difficult to
re-establish credit after using their services? Call your
debtors, and get their feedback too. For more information on the using CCCS, click here.
- The Debt Zapper program from the Bank Card Holders of America, 524 Branch Drive, Salem ,VA, 24153, prepares a personalized pay-off schedule to help pay off credit cards in the fastest, least expensive way possible. Cost is $15.
How to Live
Debt Free Forever
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:
Step 1
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.)
Step 2
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 one, magazine subscriptions go in the
‘Entertainment’ category." Carry this notebook
with you whereever 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.
ENTERTAINMENT
|
DATE
|
ITEM
|
AMOUNT
|
9/1/97
|
Gourmet
Coffee
|
$2.00
|
9/1/97
|
McDonald's
Lunch
|
$4.35
|
9/2/97
|
Donuts
& Coffee
|
$3.00
|
9/4/97
|
Steakhouse
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?
Step 3
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.
Step 4
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, etc.
Step 5
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 bills?
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.
Step 6
By now, your Master Budget should list every category where you
money goes. When you start living out your new budget on your the
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 pursuing financial freedom!
Do you have a question we haven't answered? Call us! E-mail us! or Buy the Book!
Document last modified Wednesday, 27-Feb-2002 15:12:36 EST
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