The Benefits of Low to No Debt
People who have little to no debt tend to be happy and content. Their income can be used for luxuries, savings and investment, and they are free from the harness of high interest on credit cards and loans. Further, such individuals sleep well at night, can weather a financial emergency with ease, and enjoy better overall health. Becoming debt free is a matter of initial sacrifice, self-discipline and the ability to establish and maintain a budget.
Financial Strategies for Becoming Debt Free
No matter what your current debt is, you can design a plan for eliminating it. Your ultimate reward will be a lifestyle that you enjoy and the comfort of knowing that your monthly obligations are minimal.
- Add up all of your monthly debt. This includes mortgage or rent, car expenses, insurance, utilities, groceries and personal items, loans and minimum credit card payments. Total your income. Subtract your total debt from total income. Is there anything left? If not, you are in trouble and must make a plan to lower and ultimately eliminate some of this debt. Obviously, you cannot eliminate certain debt in the short-term, however, you can establish a budget that cuts out any unnecessary expense and reduces others. The cost of groceries and personal items, for example, can perhaps be reduced by shopping sales, clipping coupons, using fewer convenience food items, etc. Morning stops for lattes are out. Every bit of money you can save on some of your expenses, you need to put toward one of your credit cards. Any additional funds you have from monthly income must go to debt payment, not to that new pair of shoes or that new video game you have been coveting.
- Organize your revolving debt. Make a list of all revolving debt and divide each balance by the minimum payment due on it. This will give you the months left on the debt. Organize the list from smallest number of months to largest. This is the order in which you will eliminate the debt. Item #1 will get every bit of extra money you have each month, so that it is paid off as quickly as possible. Once it is paid in full, take the money that was going to that debt and add it to the minimum payment of the second debt, and so on. If you follow this plan, you have an organized method, you can see the debt disappearing, and your credit score will begin to rise regularly. Of course, the additional commitment you must make is not to incur any additional debt until your existing debt is paid off.
- Pay yourself regularly. Even if it is only $25.00 a month, you should begin to save. As you regularly eliminate debt, the savings amount can also be increased. As your savings grows, you can rest easy in the knowledge that, should an emergency arise, you have the cash available and will not have to use credit cards of a loan to meet the emergency.
- If improving your credit score is tantamount to your financial goals, then you may want to devise a different strategy for debt reduction. If you can get your revolving debt below one-half of the original amount borrowed or the credit limit on a card, your score will jump accordingly. In this case, you will want to devise the same list as recommended in strategy #2 but move onto the second debt as soon as the first is below one-half of the credit limit. Each time you get a debt below this one-half mark, your credit score will jump as much as 40 points.
When Debt is Beyond Your Ability to Pay
If you are one of the unfortunate individuals who has accumulated so much debt that you are no longer able to keep up the monthly payments, you need to consider other alternatives:
- Consider a bill consolidation loan which will pay off all existing debt and give you a payment that is lower than the former debt payment combined. This will cost you, but, if you commit to a lifestyle of austerity until the loan is paid, you will be back on track.
- Bankruptcy should be considered only as a last resort. Whether you select Chapter 13 (a repayment plan over a period of years with reduced payoff amounts) or Chapter 7 (total elimination of unsecured debt), your credit will be affected for several years to come. While bankruptcy can give debtors a fresh start, it is a drastic measure. Research the laws in your state regarding this, because they do differ.
People get in over their heads relative to debt because they are not responsible spenders and savers. If you are going to launch yourself into a program of debt elimination, you must commit to a change in spending and saving behaviors. For the impulsive spender or the individual who has a long history of spending every penny that comes in, this can be very difficult. Long-term debt and financial management counseling may be warranted.