The concept of debt came about some 50 years ago. The concept of credit was created as a marketing tool by companies that wanted to sell products to customers on affordable terms. The message of credit is “Enjoy now and pay later.”
Credit itself is not bad. But when you buy everything with credit, you could be on the road to disaster. 70% of all households live paycheck to paycheck. It takes a lot of discipline to live a debt-free lifestyle.
Think of living a debt free lifestyle as a financial diet. Much like a food diet, it can be painful to fight the urges to spend money in the beginning. But as you follow the steps outlined here and you see the burden of debt begin to melt away, you will love the change.
Establish an emergency fund.
This is the most important step in a debt-free plan. Accumulate a $1000.00 emergency fund or 5% of your annual income. To do this you may have to make some sacrifices for a small time period. This may seem like a tough thing to do, especially if you are living paycheck to paycheck, but it is possible. It may require cutting out some things that you don’t absolutely need.
Little things like carrying a bag lunch to work verses eating out everyday, carpooling to work to conserve gas or passing on the $8 latte from Starbucks. The average family in America spends $500-$1500 per month on entertainment and leisure activities. The funds are there but you have to make the decision to do it.
Attacking the Debt Monster.
Start by sorting all your debts (except your house) by dollar amount. Start with the smallest debt, pay as much as you can afford while continuing to pay the minimum payment on your other debts.
Also, no matter what pay your bills on time. If not, the late charges, over the limit fees, etc. will quickly eat you alive. If you are having trouble doing this, simply call your creditors, many of them will change your due date to fit your needs. You can also take this opportunity to try and renegotiate your interest rate. Many companies will lower your rate if you ask them to. Many will lower their rate if they feel they may loss the account to another company.
Once you pay off the smallest bill, then take all the money you were paying on that bill and add it to the minimum payment you have been making. A continue this process until all your bills are paid off.
For example, if you have three credit cards with minimum payments of $30 each and you determine you can pay an extra $30 per month.
Bill A $500 balance
Bill B $1000 balance
Bill C $2000 balance
Start paying $60/mth on Bill A, and pay the minimum payments on Bill B and C. Once Bill A is paid off, add the $60/mth you were paying on Bill A to the $30 you have been paying on Bill B giving you a payment of $90/mth. Once Bill B is paid off, add the $90/mth to the $30/mth for Bill C, giving you a total of $120/mth.
If you follow this plan, you will see your debt decrease. It works if you have 3 bills or 10 different bills. But you must be disciplined. You have to attack your debt if you want to live a debt-free lifestyle.
You have to look in the mirror and ask yourself, “What am I willing to do to get out of debt?” It may mean having the willingness to live off rice and beans for a while to save money. It may mean getting a second, or even third job to earn money to payoff your debt. It may mean selling your new car and buying a less expensive used car or selling some of your personal belongings that are just sitting around.