For most people, getting rid of debt can be done if you understand your real debt, create a schedule and stay committed. While starting the process can feel overwhelming at first, the benefits you will receive from creating financial stability far exceeds the negatives.
Budget Planning
Finance specialist Dave Ramsey says, "When you see that a budget is just spending your money with intention, you'll actually experience more freedom than before. Many people say they found even more money when they created a realistic budget and stuck with it."
Budget planning is the blueprint behind any debt-reduction strategy. To get a realistic view of how much money is both spent and earned in a given month, you must create a budget. Each monthly cost must be itemized and documented to give you the full scope of expenditures. This includes food when dining out, entertainment spending for movies and such, gas for the car, and any other miscellaneous costs.
One of the most effective ways to make this happen is using the program Microsoft Excel. Virtually every computer that uses Windows as an operating system has Excel. If you don't have Windows you can download "open office" for free and perform many of the same tasks. You want to select a column and write each expense with clarity in a separate cell. Go all the way down the page for as many as you need. Then create a row of cells on top that holds a separate month in each cell. This will allow you to track your monthly expenses on a single spreadsheet, and you can compare costs on a monthly basis.
The first time you set this up, it will take a little bit of time, but once you have the format designed, it will only take a few minutes to input the data and keep it updated regularly. This must become a habit every month if you want to accomplish your goal of understanding and reducing debt.
Payment Prioritizing
Prioritizing is the process of obtaining the outstanding balance of all credit cards, personal loans, car loans, and home loans in a list from least amount owed to the largest amount. If there is any balance greater than zero, place it on this list. This is your budget "snowball," as coined by Ramsey.
The theory is to pay off the item with the lowest balance first to provide momentum. Small successes will lead to larger successes. When you are working hard to pay off debt but never feel the gratification of paying off a complete item, it can be easy to give up. You need to feel accomplishment to continue the process.
The strategy is to only pay the minimum amount to all items except for the one with the lowest current balance. Pay all extra funds to this debt until it is paid off, and then move to the next item on the list. Add the full amount you paid each month for the first item plus the "extra" amount you were paying. This will allow a faster payoff time period of the second item. Continue this payment method each month until all debts are paid. The payoff time period for each item reduces rapidly as you pay off item after item.
Commitment
While it's helpful to understand how to reduce debt, the real key is your level of commitment. Reducing debt is a process that will take time to make happen unless there is an increase in money earned. You must stick with the strategy each month and fight the urge to add to your already existing debt by purchasing new things. The level to which you remain consistent in your debt reduction quest will determine how successful it is.
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