The following is a guest post from My Honest Answer, an advice site solving your dilemmas daily. Less of an agony aunt, and more of an agony sister, my honest answer gives good honest advice: minus the sugar-coating, plus a bit of sass.
Step One: Get Real
When you owe money on credit cards it’s easy to bury your head in the sand, and ignore those mounting bills. With various debts spread across providers, it’s hard to stay on top of how much you actually owe in total.
I’m going to show you how to pay off those debts, starting today. But, none of these steps will work unless you realize that enough is enough, and it’s time to stop accumulating debt, and start paying it back. You need to be committed.
Step Two: Get Organized
Sit down, and list every single debt: amounts owed to friends or family, credit cards, car loans and store cards.
Pull out all the paperwork, and create a ring binder with all your statement and bills. Use dividers to keep each creditor’s information separate. If you do everything online, consider printing your current balances. Make this binder your Debt Control centre, where all the information you need is in one place.
Once you’ve listed every debt, order them from the highest interest rate, to the lowest interest rate. Then, check your terms and conditions for non-credit card debt to see if you can make early repayments without penalty. This is crucial, because, if possible, you want to pay off the most expensive debt (the ones with the highest interest rates) first. You should now have a hit list showing which bills are your top priority.
Step Three: Get Automated
The last thing you need is late penalties and charges increasing your debt. Now you have all the information in one place, it should be fairly simple to set up regular payments to cover the minimum amount required for each debt, if these are not already in place.
I would suggest doing this for every single debt, to make sure you are never caught out by being out-of-town, or down with the flu for a few days. You can then make all your extra payments manually.
Work out how to do this for the first debt you plan to pay off – directly through your internet banking, by phone, or by check. If you will be making payment by check, address some envelopes, stamp them, and put them in the file. When you’re ready to mail a check you don’t want anything holding you up!
Step Four: Get a Budget
List out all of the minimum payments on each debt, plus any other ‘must pay’ bills such as taxes, mortgage or rent, and utilities. You need to know exactly how much ‘disposable’ income you have left at the end of every pay period. And you may be surprized by how low the figure is compared to the amount you were spending. I know I was!
You need to divide up the remaining money to pay for everything else. And I don’t just mean food, entertainment, and gas. Everything else. Haircuts, auto insurance, life insurance. Every single expense that you incur in the year.
This is often where people fall down. They set unrealistic budgets, or forget to include small items, such as lunch money for the kids, or parking fees, which, over the course of a year, really add up. Be honest here. It doesn’t matter if there doesn’t seem to be much left over for debt repayments. We’re going to work on that in a moment.
Step Five: Get Thrifty
Look at all those items in your ‘discretionary’ list. Is there anything you can cut? Dance lessons for your child that they don’t really enjoy? Could you have your hair cut less often, or try an ‘at home’ color?
For those working outside the home, an easy area to tackle is lunches. You can make cheaper, healthier, and tastier things to take with you, and save a ton of money, and time.
Look at your grocery spending. If you eat a lot of meat, try to introduce two meatless meals a week. A homemade pizza, or pasta and salad is a good choice.
To save on take-outs, consider batch cooking and freezing some of your favorite meals. It’s really very little extra effort to make double your usual casserole and freeze one for a later date.
Look again at all your insurances. Have you shopped around lately? Do the same for any utilities you might be able to switch. Call your cell phone provider and tell them you may have to close your account as it is too expensive. You will be surprised how hard some companies will work to keep your business.
Step Six: Get Decluttering
Once you start paying close attention to where you are spending your money, and how much things really cost, you will probably start noticing things around your home that you bought, which you now realize you do not need. If you’re anything like me, these expensive impulse purchases will really annoy you as you struggle to pay off the debt they left you with.
The solution? Sell them. You can get really good prices for good quality items on Ebay, Craigslist, or Amazon. You probably won’t recoup what you spent, but that’s no reason to hang onto things that you don’t need, use, or that make you feel bad.
For the best prices, you need to put in some effort. Spend the time to clean up the item. Take good, well lit pictures from lots of angles. Include as much detail as you can – especially measurements. And make sure you check postal prices before you list items to ensure you’re not going to get a nasty shock at the post office.
Step Seven: Get Motivated
A few months of following these tips and being serious about paying down your debt should have seen a few extra payments going to those creditors. Doesn’t it feel great? Using a spreadsheet to monitor your total debt as it falls is a great motivator. Crossing off each debt as it is paid off will really spur you on.
Step Eight: Get Serious
If the debt isn’t falling as fast as you’d like, it might be time for more drastic measures. Can you sell your car for an older, cheaper, or more efficient model? Or can you get away with selling one car altogether? It might even be time to look at cheaper housing options, which, though drastic, will leave you with more disposable income in the future, too.
Step Nine: Get Snowballing
Snowballing is a tactic to pay off debt faster. Once you’ve paid off one debt, you move the total amount you were paying each month to the next debt on your list. Do this each time you pay off a debt and it has the effect of a snowball rolling down a hill, getting bigger, and gathering momentum. By moving the cash allocated to that debt straight to the next one, you can compound the benefits, and gradually you start paying off each debt faster.
Step Ten: Get Debt Free
Finally! You’ve done it. It may take a while. In my case it took a couple of years, and at the time, it seemed never-ending. I’ve been debt free since 2009 now, and boy do I sleep easier. I’m also much more careful about where my money goes, and I enjoy the purchases I do decide to make so much more.
But, one last thing. Don’t forget Step Eleven: Start Saving!
Does anyone else have any great tips for paying off debt? Or other ways to stay motivated when it feels like you’ll never be debt free?