Happy New Year! Time to make your New Year’s Resolutions once again, so what better time to work on becoming debt free? Here are some tips that can help take you out of the tailspin you may be in after the holidays.
1. Write down all your current debts in order of their balance, starting with the smallest balance first. I’ve placed an Excel Debt Snowball template in the “Box” on the right if you prefer to use that instead of writing it down. Make sure to include credit cards, auto loans, student loans, mortgages, etc. If you have 2 balances that are similar, write down the one with the higher interest rate first. Otherwise, don’t worry about the interest rate of each item since we are mostly concerned with making progress quickly to build momentum towards your goal of becoming debt free. Imagine the feeling you’ll have when you can check-off a credit card balance that’s been lingering for years? You’ll be even more motivated to get that next item marked off the list. Once you have the top item on your list paid off, cross it off and move down to the next item. Add the amount of money that you were paying to the item you just paid off to the minimum payment of this item. Continue this process until you have all your debts paid off.
2. Next, track your spending. There are many methods of doing this. If you are comfortable with technology, there are free online programs such as www.mint.com that can help. If you prefer to track your spending manually, Microsoft Excel (I’ve included an expense template in the “Box” on the right for this as well) or the old pen and paper work well also. One mistake a lot of people make is that they just assume they have already cut their spending as much as possible. You’ll be surprised how much money you are spending on certain discretionary (i.e., wants not needs) items such as going out to eat at restaurants, entertainment, etc.
3. Now that you have an idea of what you owe, and how much you’re spending, it’s time to analyze. What are some things you can eliminate? Would it be the end of the world if you didn’t have cable TV? How about reading the newspaper online for free instead of paying for the subscription? Do you need the cell phone plan with a million minutes per month, or is there a cheaper alternative, even if it means eliminating text messaging? Are you bringing your lunch to work instead of going out to eat with co-workers? How about a date night once a week where you eat out at a restaurant, and every other meal during the week you cook at home? After you realize how much you can save by eliminating these nice, but not necessary things, you need to take that savings and pile it on to your debt payments. It might be hard initially, but I promise, after 3 months you won’t miss these things and you’ll feel much better seeing your credit card balance shrinking.
4. Finally, it’s time to find ways to save while spending. Will your insurance carrier give you discounted rates if you have your auto insurance and home owners’ insurance with them? Most will, so if you have your insurance with different carriers, look and see if it makes sense to move all your policies under one. This is also a good time to review your deductibles on each policy to see if it makes sense to raise your deductible in order to have a lower premium payment. Another way to save is by seeing how low you can tolerate the thermostat during the winter months. There’s a lot of money to be saved if you can turn the heat down and wear more clothes or go under a blanket instead.
Hopefully these tips can help bring you closer to becoming debt free in 2010. Obviously, these are just a few of the ways you can eliminate debt. If you have other ideas that have worked for you personally, please add a comment for others to read.
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John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit http://www.chladekwealth.com.