The Next Step to Frugal Living Is to Get Out of Debt

Posted on January 24, 2008. Filed under: Frugal Living | Tags: , , , |

Thursday is about Frugal Living

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unum.jpgWill I ever get rid of my debt? Being debt free is definitely one of my goals for frugal living. Having no debt would free a significant part of my budget for savings and investments. But how does one get out of debt?

I am working on a plan to be debt free in two years, and here are the steps I am taking.

First, get a handle on all the places you owe money. Student loans. Credit Cards. Lines of Credit. Car Loans. Friends and Family. Mortgages. Home Equity Lines. Write them all down, so you know who you owe and how much.

Then prioritize your debt based on what it buys you. Since student loans and mortgage buy something that increases in value, then I am comfortable carrying that debt and paying it off slowly because I consider it an investment. Everything else is probably consumer debt and loses value over time–cars, clothes, trips, eating out– all of these things do not increase in value and are basic consumer debt. This is what should be tackled first. Once this is paid off, then you can make a plan to pay off other debt like mortgages at an accelerated rate.

Then look at your monthly budget and decide how much you can afford to apply towards debt after you pay your other bills. Be aggressive in carving out as much of your budget as you can. While it may be tempting to put your money into savings, it makes more sense to use your money to eliminate debt where you are charged double digit interest rates, rather than putting your money into a savings account with single digit returns. Even so, I keep a small amount for savings just in case of emergencies, and to avoid having to use my credit card if something comes up.

Then figure out which sources of debt are charging you the highest interest rates. The highest interest rates will probably be on your credit cards. According to Bankrate.com the average interest rate for a standard credit card is currently 13%. Usually, you will want to target the highest interest debt you have first. However, there have been times when I tackled lower interest, but lower balance debt so I could quickly get to my goal of eliminating one of my sources of debt.

Always look for opportunities to lower the interest rates you are being charged. You can call your credit card companies, and if you have been paying your bills on time, you can often negotiate a reduction in interest rate. Also, your cards will often send you offers to transfer your balances to get a lower rate. Consider taking advantage of these–but check the fine print! Some of these balance transfers come with a fee– often 3%. So if you get an offer to transfer your balance to get 5% interest, but there is a 3% transfer fee, then you are really getting an 8% rate. Also, if you get an offer for a new card with a low interest rate, keep in mind that taking on another card and the potential for more debt may lower your credit score. So before jumping at one of these deals, consider all of the options.

Do not pay the minimum amount requested. Pay as much as you can. I found it better to pay as much as possible on higher interest debt, while paying less on lower interest debt. Then once the high interest debt was paid off, I added that same money to the payments being made on the lower interest debt. Over time, your payments get larger as they roll over from one debt to another, and you can aggressively attack those last few sources of debt.

While it may seem obvious, do not take on anymore debt. Stop using your credit card or line of credit and focus on bringing it to zero. Make a budget and stick with it. Pay cash for everything possible. Bottom line: don’t spend more than you earn.

Think of the money you apply to debt each month, and imagine what it would be like to have that money available to you each month because you no longer have debt to pay off. If you have carved out a good chunk of your budget for debt, that can be a lot.

Even with this plan, it’s hard. Something always seems to come up–the car needs repairs, the kids need something for school, something breaks in the house– and I end up using my credit cards more than I want to. My biggest motivation is imagining the day when I no longer have these bills. If I am strict with my plan, and nothing comes up, then it will take two years. Seems like a long time, but at least there is an end in sight….

Anne

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3 Responses to “The Next Step to Frugal Living Is to Get Out of Debt”

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I agree. this is one of my personal goals as well. I think

I put all of my monthly expense reports on my American Express card, groceries, dry cleaning, Starbucksetc. which I track against my budget and payoff every moth. The good news is that i also get the frequent flyer miles

Every little bit helps!
Anne

Being in debt can be one of the hardest and most exhausting experiences you have ever faced. It takes a lot of will, discipline, courage and help to slay the debt monster. But it can be done. Good luck!


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    Musings on how a disorganized woman with a full time job, three kids and a real need to relax is trying to make life simple.

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