It is so tempting to whip out your credit card to pay for that new pair of shoes – it’s the last pair in your size and they’re on sale! After all, you don’t have to pay for it now… You’ll worry about that when the bill comes next month, right? Unfortunately, it’s a slippery slope. Before you know it, you’re knee-deep in credit card payments, and you don’t know how you got there.
As I discussed last week, getting out of debt is the first step to building a healthy financial life, but it can feel daunting. Here are the first steps to help you tackle your debt, so you can start focusing on building your financial future.
Get a snapshot of your debt. Pull out all of your credit card statements and other bills like auto loans and student loans (not including your mortgage). Make a list of your accounts, how much you owe on each, what the minimum payments are, and what the annual percentage rates (APRs) are – this should all be found on your most recent statements.
Determine how much you can afford to pay each month. This is where my Personal Finance Worksheet comes in handy. Once you have a few months of data entered, look at the last row, “Surplus Savings.” Do you have money left over at the end of each month? If so, great! If not, now would be a good time to have a hard conversation with yourself about reigning in your spending. Even if you can trim out small amounts that you can put toward debt, it will help.
To determine if you have enough to cover your debts, add up all of the minimum payment amounts from the list you made in the previous step. You want the total of the minimum payments to be lower than your “surplus savings” amount. If it’s not, see above about the hard conversation.
Focus on the highest interest accounts first. You want to prioritize paying off your highest interest loans first. For example, if you have a credit card with an APR of 14%, and a student loan with 8% APR, go for the credit card first. Put any extra money each month toward the highest interest loans first, and pay the minimum amounts on the other loans in the meantime. Once the highest interest loan is fully paid, funnel all surplus funds to the next highest loan.
Set milestones and track your progress. Research has shown that humans are highly motivated by realistic, attainable goals. Rather than feel overwhelmed by the total amount of debt you’re trying to pay down, set short term goals that you think you’ll be able to achieve, such as “Get credit card balance down to $2,500 by October 2014.” Put a note in your calendar for the target date to remind you, or if you use a program like Mint.com, you can set a goal there.
If you are truly feeling suffocated by your debt, a more extreme approach might be order. Check out Anna’s plan for getting out of debt quickly on And Then We Saved. It could be life-changing!
Phew! That was a lot of debt-talk. But remember: you’re doing important work here, taking control of your financial future.
Please note: I am not a financial expert and speak to financial topics from my own personal experience. Please consult a financial professional before making any of your own personal financial decisions.