According to Federal Reserve statistics, the
average American household has over $15,000 in credit card debt. More and more
college graduates are leaving school with student loans, with the average
student debt being over $30,000. These debts, combined with mortgages, vehicle
loans, and other personal loans adds up to a total consumer debt of nearly $12
trillion. How can you avoid being another debt statistic? If you are ready to
end debt permanently and begin building wealth, consider the following 5 easy steps:1) Make a Written Budget
The first step to gaining control of your finances is to make a written budget. Using a spreadsheet or good old-fashion pencil and paper, list your monthly income and subtract out your monthly expenses. Hopefully, you have a surplus to work with. We will address later what to do with that surplus.
If your expenses are greater than your income you must find ways to either reduce your expenses or increase your income. Typical areas of overspending include dining out, groceries, and lifestyle luxuries that simply aren’t needed. If you are trying to get out of debt, this is not the time to take expensive vacations or go on unnecessary shopping trips. Other potential cost cutting areas are home and auto insurance, cell phone service, and cable television. If you haven’t obtained quotes on auto and home insurance in recent years, you may be surprised at the cost savings. For cell phone and cable service providers, you may be able to contact their customer service departments and negotiate lower prices.
If you cannot cut expenses further, consider whether you need to earn extra income by working overtime, taking on some freelance work, or selling some of your possessions.
2) Pay Off Your Debt
After making your budget, develop a strategy for reducing your debt. List all of your debts from smallest to largest. Check your list against your credit bureau report to ensure you don't have any old outstanding debts you forgot. It's also a good idea to check to ensure you don't have accounts on your report that are the result of fraud. Looking at your list of debts, plan to pay the minimum payment on all except the smallest. Apply all of your surplus to this smallest debt. Once it is paid off, then apply everything to your second debt. While it can seem counterintuitive to not pay down the higher interest rate debt first, this method allows you to make quick progress. When you see items getting paid in full, this will give you momentum to continue your plan to get out of debt.
3) Monitor Your Activity
To really gain control of your finances you must monitor your actual spending. On at least a monthly basis, compare your actual spending to your budget. If you find you routinely go over in certain categories, consider whether you need to tighten spending in this area or if you perhaps under-budgeted. Make adjustments accordingly.
4) Establish an Emergency Fund
Building up an emergency fund will be the key in avoiding going back into debt. It is recommended you have at least three to six months’ worth of household expenses in savings. In the event the air conditioner goes out or the car needs an expensive repair, you will not need to rely on a credit card.
5) Work Toward Long-Term Savings Goals
Once all of your debt is paid off, you can focus your efforts on saving for retirement, your children’s college education, investing, or other savings goals. You can begin to build wealth for the future to help ensure you are secure during your retirement and build a legacy for the future.