We’ve all been there, we’ve all said it, and we’ve all had to have it. Whether it’s that new pair of shoes, the latest 60-inch 3D ready flat screen TV or that new sleek and shiny gadget you simply have to have before anyone else does. We buy it now and pay later. Our reasoning turns into justification and our justification becomes an excuse, until that day comes when the spending high wears off and the debt hangover kicks in. Being deep into debt, can be one of the most suffocating predicaments to be in. It can take away your freedom, affect your relationships and ruin your credit score.
The discipline that it takes for someone to get out of debt is very similar to the discipline it takes for someone who wants to lose weight or get into shape. It is always easier to get into debt than it is to get out of it, much like it is easier to gain weight than it is to lose it.
We all know that the healthiest diets are the ones that are done gradually with a proper balance of exercise and eating right. Miracle diets or pills that promise a lot in a short period of time may work temporarily but are unhealthy, and often the weight comes back. In order to get out debt, you have to be honest with yourself, set realistic goals that are obtainable and most of all you have to be patient. Here are 5 key steps to getting financially fit, while at the same time developing healthy spending habits that will prevent you from gaining that debt weight back.
1. Be brutally honest with yourself- take time to truly evaluate your financial situation, and define “need” vs. “want”. Make a list of all of your expenses; divide them into separate categories starting with living expenses that include rent or mortgage, utilities, groceries, car payments, insurance etc. Then in another category list all the luxury items that you consistently spend money on like gym memberships, meals at restaurants, Starbucks, entertainment etc. then see what you can cut back on and what things you can eliminate all together. When was the last time you used that gym membership? Can you get the same results by running at a park near your house and doing some home exercises? Do you still need to have both a landline and a cell phone? See how you can cut back on your utilities by using the dishwasher less, or using your washer and dryer only on weekends when the rates are significantly lower than they are during the week.
2. If you can afford to, stop using credit cards all together. Use only cash or your debit card. You always hear everyone’s excuse of using their credit card to get “points” or “miles” well, guess what? Those points and miles cost money. Using a debit card will keep you more disciplined because you know the money is being taken out of your checking account the moment you make that purchase. Psychologically it is so much easier to go all willy nilly on a credit card because you are in essence borrowing money to buy something, that you have a month to pay back. It is also much easier to pay a credit card off when there aren’t new charges coming in. Seeing your credit card balance go down every month will keep you motivated and focused, the same way getting on a scale and seeing that you have lost weight will keep you wanting to diet and exercise.
3. Consolidate all of your credit cards on to one card, with a low interest rate that is fixed for at least 6 months to year, if not longer. This will give you one payment and one interest rate to keep track of every month. If you cannot, pay off credit cards with smaller balances first and work your way to the ones with larger balances last. When you finish paying off the cards with smaller balances you can then add that payment to the payment you are making on the credit card with a larger balance and pay it off quicker. Once your cards are completely paid off resist the urge to close them all at once. Having a credit card with a high limit and no balance will lower your DTI (debt to income ratio), which will improve your credit score. Simply tear up the card itself to keep it out of sight and out of mind. And don’t be afraid to ask. Most credit card companies and financial institutions are willing to work with you to reduce your interest rates if you are proactive in your approach, even changing a due date might give you some breathing room. I recently contacted the bank that was holding my student loan to give them my new banking information so they can continue to automatically debit my monthly payment. While I was on the phone with them I simply asked them if there was anything they could do to reduce my already low fixed rate of 2.65 % and within minutes they reduced my rate by 1 percent, and all I did was ask.
4. The envelope system- this system is designed for those who really want to buckle down. Set aside envelopes for common monthly expenses such as groceries, meals and entertainment and pocket money and label each envelope accordingly. Budget a certain amount of cash in each envelope every month, and ONLY use the cash in the envelope for each designated expense. Once the cash is gone, you can no longer spend any additional money on that particular expense, if there is a surplus at the end of the month use what is left toward paying down credit cards or put it into a savings account.
5. Treat yourself! Anytime you give something up completely, you will eventually fold to cravings and temptation and end up bingeing, possibly un-doing months worth of hard work and discipline. The best way to avoid this is by treating yourself every once in a while. If you have decided to bring your lunch to work everyday rather than going out, treat yourself by going out 1 or 2 Fridays a month. If you now bring your coffee to work rather than going to Starbucks every morning, allow yourself that 1 Latte a week to treat yourself for all the sacrifices that you have made. This is the best way not to end up un-doing what you have worked so hard to accomplish.
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