What does “financial security” look like to you? Is it having all your bills paid, or money in the bank? Do you need a large investment portfolio or fat retirement account? Do you have enough cash on hand to support your family for a few months in the event of unemployment? According to CNBC, “even six months’ worth of expenses isn’t sufficient… it’s advisable to have at least eight-to-12 months’ worth of living expenses in reserve.”
If that sounds like a lot, it’s because it is for the vast majority of Americans. In fact, nearly half of all Americans are currently living paycheck-to-paycheck, which means in the event of a crisis, they would be left with virtually no options. Even more disturbingly, most Americans are in deep debt. Business Insider shares some frightening insights into debt in the United States:
- The total amount of consumer debt is nearly $2.4 trillion, or approximately $7,800 per person.
- 33% of that debt is revolving credit card debt
- 1 in every 50 households (approximately 2 million households) carries more than $20,000 in credit card debt.
If you’ve lost control of your finances and are ready to start unburying yourself from the burden of debt, know that it can be done. It will be a process, but you can start managing your debt more effectively, and ultimately eliminate your debt entirely.
- Follow the money. The first step in learning to manage your debt and take control of your finances is getting a realistic sense of where your money is going. You’d be surprised how many people not only don’t know what they actually spend their money on, but also don’t have real knowledge about just how much they owe. You need to sit down with a list of every single expense you have and start tracking everything you spend money on. Then you need to compare that list to an honest assessment of the money you have coming in each month (i.e. your income after taxes). If you don’t have enough money to cover your expenses, or if you have too little money to dedicate to paying down debt, it’s time to start strategizing further.
- Trim the fat. Now that you know how much money you have coming in versus how much you have going out, it’s time to find ways to have more leftover cash at the end of the month. Reduce entertainment expenses, including things like Netflix, cable, and even the internet. Cancel memberships to gyms, clubs, subscriptions, or other paid services that aren’t absolutely necessary to the running of your home.
- Lower fixed expenses. In addition to eliminating unnecessary purchasing, it’s important to find ways to lower fixed expenses if you want to get serious about getting out of debt fast. Install energy efficient light bulbs and be conscious of your water, gas, and electric consumption. Lower data cellular plans and get creative with the grocery budget. There are some expenses you’re always going to have to deal with, so figure out how to get the most bang for your buck on them.
- Get a second job. It’s not the most fun recommendation, but any extra income will help you pay off debt more quickly. Getting a second job has the added benefit of reminding you just how hard you actually work for the dollars you spend. If you’re used to getting a large tax return each year, consider adjusting your withholding to better reflect your tax bracket and have extra cash on hand each month.
- Transfer high-interest debt. If you have a relatively manageable sum owed, transferring your high-interest debt to a 0% introductory APR balance transfer card may be the quickest route to financial freedom. It’s much easier to make a dent in what you owe when you aren’t paying hundreds of dollars in interest every month. Just make sure you can pay off the debt in the promotional period.
- Negotiate terms. When it comes to money owed, there can be a lot more wiggle room for debtors than creditors would like you to believe. You may be able to negotiate better interest rates or have fees removed. There are also options like debt consolidation, debt settlement, loan repayment plans and forgiveness programs, and other financial help readily available to people looking for help taking control of their budgets.
- Snowball your debt. Debt advisor and media personality Dave Ramsey is known for his recommendation of “snowballing debt.” This method of attack involves paying off the lowest balance first, then taking the money that would have been contributed to that debt and applying it to the next lowest balance, and so on. This strategy can be extremely motivating, since you get to see debts disappear more quickly when you focus on getting rid of the smallest bills first.
- Pay high interest rates first. The alternative to the “snowball method” of attacking debt is to try to pay off the highest interest rates first, to reduce the amount of unnecessary cash spent in the process of paying things off. Either plan can work and has its own merits, but ideally you would strike a balance between the two; for example, taking the extra money from the snowballed balances and applying it to the card with the highest interest rate.
- Start tracking your credit. Now that you’ve got a handle on what’s happening with your finances, it’s important to stay in the know. Start tracking your credit through any number of free websites and apps, and stay informed about potential cyber security threats that could undo all your hard work.
- Don’t rule anything out. When it comes to unburying yourself from a mountain of debt, it’s important never to rule anything out. You may have to sacrifice some things you thought you’d never live without. You may have to seek the advice of a credit counselor or even consider filing for bankruptcy if things have really gotten too far out of hand. Don’t take anything off the table when it comes to being able to rest easy knowing your finances are straightened out.