Sunday, September 4, 2011

The "D" word

Now that you've started thinking about your bank and credit card accounts, it's time to start making sure you put them to work.  My next few posts are going to focus on using your accounts to make your life easier.  This will take a little bit of time and some getting used to but, in the end, it'll definitely save you a lot of time and stress.

The road to a stress-free financial life starts with one nasty little word that we all have to deal with at some point: debt.  Americans have developed a belief that it's normal to have debt or to spend more money than they actually have.  In fact, the average American household owes more than $15,500 in credit card debt.  The average student graduates with about $4,000 in credit card debt before even starting a full time job!  Debt, especially on credit cards, only causes stress and leads to you paying much more than you would have if you paid with money you already had available.

Some debt is good.  When it's used to pay for a house or an education, that's understandable.  These things can be very expensive and they typically appreciate, meaning they gain value over time.  Debt can lead to trouble when it's used to buy items that depreciate over time, like clothes, a t.v., or an iPod.  Paying for these things with a credit card will cause you to pay much more for them, especially if you just make the minimum payment!  It's easy to spend on things like this because they're fun, but clothes or an iPod are even more fun when you can pay for them up front and not have to pay interest!

Now, statistically speaking, the odds are that you already have debt.  Don't worry, after reading this you should have everything you need to start attacking that debt and paying it off aggressively.

Start by taking a few minutes to figure out what you owe.  Take a piece of paper or open up a spreadsheet on your laptop and make a debt chart.  List the name of the credit card, the total you owe, interest rate, monthly payment amount, and the due date.  This chart will help you see exactly how much you're in debt and will allow you to make a plan for paying it off.

The next part is tricky and, sadly, there's no quick fix or easy way out of debt.  Don't get discouraged though - there is light at the end of the debt!  There are a few methods you can use to pay off your debt; all of them can be effective, but you have to stick with it.  Getting out of debt is something that requires persistence and will power but will benefit you big time once you accomplish it!

I'll leave you with a short review of a few methods for paying off your debt:

Snowball Method - this is probably the most often used debt payoff method.  You pay only the minimums on all of your debts except for the smallest balance.  You pay off the smallest balance as quickly as you can.  Once the smallest balance is completely paid off, you take the minimum payment from that and apply it toward your next smallest balance and so on.  Every debt that you pay off means you have more money available for the next payoff, until you are completely debt free.  This is a great method because it lets you see the progress you are making and it feels great when you pay off a debt completely!

 Interest Rate - in this method, you'd pay off the debt with the highest interest rate first.  This would mean that you'd have to make just the minimum payments on all your debts and put extra money toward your debt with the highest rate.  It may take a little longer to notice results with this plan, but you would save a significant amount of money by paying off the debt with the highest rate first.

Minimum Payment - this plan is pretty simple.  Once you have all your debts listed you will be able to see the minimum payments.  You should also know how much extra you can afford to pay over the minimums each month.  This method just says that you should apply extra payments to your debts equally.  For example, if you have an extra $200 to use to pay off your debts each month and 2 credit cards, this method would say that you pay an extra $100 toward each card every month.  This is a decent method, but the more debt you have, the longer it will take you to notice results with this method.

In the end, the plan you choose is completely up to you.  Just make sure you stick with it and most importantly, make sure you don't add any debt while you're trying to pay it off! (DUH)  Trust me, those jeans you're wearing will last you long enough to pay off your debt.  Then you can buy new ones with money you have available as a reward!

Remember, the most important thing is to stick to the plan!  If you get discouraged, go back to your goals and remind yourself what you want to save up for.  Being debt free will help you accomplish any financial goal that you have.  Remember that vacation you've always wanted to take or that new laptop you want to buy?  Stick to your debt payoff plan and you'll be that much closer to reaching that goal.


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  2. Hello there! This article could not be written much better!

    Looking at this post reminds me of my previous roommate!
    He always kept preaching about this. I'll send this post to him. Pretty sure he's going to have a great read.
    Thank you for sharing!

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