It’s easy for debt to suddenly overwhelm any of us. Medical emergencies, expensive car repairs or an unexpected death in the family can all cause your debt to quickly spiral out of control. What was once manageable is now out of control, but there are ways to tackle your debt using these five tips.
1. Calculate Your Disposable Income
Write down all the money coming into your household on a monthly basis — not your gross wages, but the money you take home after taxes (there are plenty of tax calculators and estimators online that can help you). Next, make a list of every expense you pay monthly, including what you spend on eating out and entertainment.
List annual items like property taxes, auto fees, and life insurance premiums, and divide that number by 12 to obtain the monthly amount. Include everything on your expense list. Subtract all the expenses, and this is your disposable income; i.e. what you can use to tackle debt.
2. Review Your Credit Cards
If you want to control your debt, immediately stop using credit cards. Review all of your cards for:
- Payment Due Dates: If the due dates are hard to handle based on when money comes in, call the company and ask if they can change the due date to avoid penalties and additional interest.
- Interest Rate Per Transaction: Some credit card companies may charge a different rate for an online purchase compared to a cash transaction at a grocery store. The rates for cash advances at ATM machines are also different. Write down the rates for all types of transactions. Review to determine which transactions cost you the most and stop them.
- Transferable Balances: See if you can transfer any of your balances to a card with the most benefits; low interest rate, customer rewards, etc.
- Minimum Payments: Start paying off card balances by increasing the minimum payment on the lowest balance and continue until you’re credit card debt-free.
3. Prepare for Emergencies
One of the reasons many of us face debt is that we don’t plan ahead for emergencies. Fisher Investments Investing IQ recommends being prepared by saving money in a high-yield interest bank account or money market account.
You can also use a portion of your disposable income to start investing in stocks, bonds or mutual funds to build a retirement fund. Seek the help of a professional to reap the most benefits — financial advisors also help you avoid the temptation of withdrawing invested funds. Effectively, they can become your number one ally.
4. Stay on a Budget
Start tracking expenses using a household budget template. If you do this monthly, you’ll be able to review and see areas to cut back on. You might be spending too much for eating out or on entertainment. Or all those trips to the hobby store or home improvement center may be running up more debt than you realize. Once analyzed, lower these expenses or stop them altogether.
5. Change Your Spending Habits
How you spend money reveals a lot. Do you always pick up the check when you’re out with friends? Are you the one in the family everyone expects to pay for certain items? How you spend is a habit you can analyze and control.
Track one week’s worth of expenses to discover your spending habits and turn them around. You don’t have to buy lunch for your co-workers and many of them are in the same financial boat as you. Tell them you’re on a new lifestyle plan.
It can be hard to take control of your debt. You have to take initial steps using these tips. The longer you put off a new financial plan, the more your debts will grow.
