Even though debt is the norm in the United States, you do not need to be obligated to creditors forever. The key to getting out of debt is formulating goals, because goals permit you to measure your financial success. However, sometimes people aren't sure what goals they should have or what is reasonable. Everyone's situation is different, but some basic goals apply to everyone.
Goal 1: Set Up Plans
Your first goal in eliminating your debt should be to formulate both a budget and debt repayment plan. These two plans are intertwined because debt repayments are part of the monthly expenditures you include in your budget. To make these plans, take all your financial records for the last six months and average what you are paying to each agency. Then look at your pay stubs and any other reliable income sources to determine your income. Subtract your expenditures from your income. Whatever is left is discretionary -- divide this money for non-essentials like entertainment, being sure to set some aside for savings. Usually, when formulating your debt repayment plan, you should figure out which creditor has the highest interest rate and concentrate on that debt. Figure out approximately when you'll eliminate each debt.
Goal 2: Track Your Spending
To stick to your budget, you have to track everything you spend. This makes you more aware of where you're overspending and shows you where you may need to adjust the budget.
Goal 3: Slash Your Debt-to-Income Ratio
A high debt-to-income ratio is a bad thing in personal finance because it severely limits your eligibility for additional credit should you need it. Eliminate the expenses you can, and be consistent about your debt payments so that your debt-to-income ratio is 30 percent or less. This is the cut-off limit for many creditors' programs.
Goal 4: Name Your Alternatives
Sometimes people get trapped in a cycle of debt simply because they don't see the other options available to them. Look at your standard of living and assess how you can make small changes to save. For example, if you order pizza every Friday, try a frozen pizza from the grocery store instead.
Goal 5: Be Informed
Too often, debt accumulates because people don't read the fine print on their credit contracts, or because people don't take the time to ask questions and acquire multiple quotes. Never purchase or sign anything unless you are familiar with all the terms and conditions. Shop around and know your rights.
Goal 6: Don't Hide
Debt can be embarrassing, particularly if you owe a lot. Even so, if you try to hide the debt, you essentially cut yourself off from sources of assistance. Be proactive about seeking debt counseling and don't shoulder all the financial responsibility for your household alone.
Considerations
It is normal to make some mistakes as you try to modify your existing financial systems and rectify your debt, but the more consistent you can be with your new habits, the sooner you will reach the goals you set. That said, all goals invariably take time to reach. Be patient and look back at the progress you've already made if you feel discouraged. Lastly, reassess often. As your circumstances change, your debt goals may have to change, too.
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