7 steps to get ruthless about paying off your debt
Ready to get serious about paying off your debt? Read this step-by-step guide about how to find the money to make it happen.
This post comes from Maryalene LaPonsie at partner site Money Talks News.
Dave Ramsey calls it getting "gazelle intense."
The popular get-out-of-debt guru uses the term to describe that singular state of mind in which you think of nothing other than getting out of debt and away from your creditors.
It's an interesting concept, but Ramsey can sometimes be decidedly short on the details about how to hit that intensity.
If you're wondering how to get gazelle intense, let us fill in the blanks. Here are seven steps to start ruthlessly attacking your debt:
Step 1: Rethink your budget from the ground up
If you already have a budget in place, this step will be easy. If you don’t, first go read this article for a simple way to create a budget.
Pull out your budget and scrutinize each and every line item. Eliminate everything that isn't a need -- and by need, we're talking about things that help you stay alive, stay healthy or stay in a job. Everything else can go. Cut the cable. Eliminate the Internet. Cancel the cellphone.
Then, take a second run through your budget and think long and hard about how to reduce what's left. Could you install a programmable thermostat to save on your heating bill? Maybe cut coupons to reduce your grocery spending? Or think really big and consider whether it makes sense to downsize your house or trade in your cars for cheaper vehicles.
Step 2: Stop spending and start saying no
Now that your budget is stripped down to the essentials, you need to flex your self-discipline muscles.
It's time to stop spending. That means no weekend trips to the mall, the thrift store or the art show. Likewise, stop swinging into the farmers market or the street vendor fair just to see what's there. Only go into stores or marketplaces if you have planned (and budgeted) purchases in mind.
Also, get in the practice of saying no. If your child wants candy in the checkout lane, the answer is no. If your spouse suggests seeing a pricey concert, the answer is no. If your friends want to go out to eat to the swanky new hot spot, the answer is no.
Of course, you need a little common sense too. Unless you want to be pegged as Mr. or Ms. Scrooge, the key is to have a free or cheaper alternative in mind that you can suggest right after you decline.
And special occasions may require a little flexibility on your part. If your friend wants to celebrate her birthday at a particular restaurant, it would be rude to demand a venue change. Assuming you can afford the meal, by all means, go and enjoy time with your friend. Don't forget that people are more important than money -- even when you're gazelle intense.
Step 3: Limit your access to cash
To help with step No. 2, limit your ability to spend. A cash envelope system is often used for this purpose, but it's not the only way to stop from overspending.
With a cash system, you leave the debit and credit cards at home and use cash only.
However, if carrying cash makes you nervous, try a variation that involves plastic.
Open a prepaid card and load it with only your budgeted amount for the week. Make that the only card in your wallet and opt out of any overdraft protection to force yourself to keep your spending in check.
Step 4: Sell at least half of what you own
Next, look around. What do you see? If you're like the average American, you're probably surrounded by items you don't need and rarely use. It's time to move those things out and bring some debt-paying cash in.
There are a couple of different ways to do this. You could try selling it all on a single weekend during a yard sale. Another option would be to piecemeal it out to get top dollar from various sources.
The best option will depend largely on your personality. Some people don't mind intense work for short periods of time but get frustrated if a project seemingly never ends. In that case, a yard sale may be the best bet, particularly if you can combine it with a community sale day. Other folks like the slow and steady approach, perhaps posting 10 items a week to eBay or Craigslist for a small but steady cash flow.
Step 5: Earn extra cash whenever you can
Many people living in debt find their budgets are exceedingly tight. The money comes in and goes right back out. There is very little wiggle room to make extra payments. That's why you need to stop spending and start selling.
However, go one step further and start bringing in extra income whenever possible. Depending on your individual circumstances, that could mean picking up a second job or offering to take extra shifts or overtime.
If you aren't able to commit to a regular job, you could try baby-sitting, housecleaning or even using your smartphone to make extra money (assuming the phone is still in the budget). Plus there are a lot of other little ways to rack up a few dollars here or there.
Step 6: Consolidate your debts
This step may not apply to everyone, but if you're carrying around multiple debts with high interest rates, you may want to consolidate.
You could do this in several ways. First, if you have equity in your home, you could apply for a line of credit. These loans often have lower interest rates than credit cards, and you may be able to deduct the interest on your income taxes. However, lines of credit may require loan fees and an appraisal, which can make them cost-prohibitive.
Another option would be a personal loan you use to pay off your other debt and credit cards. With financial institutions still licking their wounds from the Great Recession, these loans may be hard to come by.
Finally, you could transfer existing balances to a low-interest or zero interest credit card. Many of these cards come with an introductory period, after which the rates can zoom to the stratosphere. Be sure you're able to pay off the debt before the promo period is over or at least transfer it to a different card. Plus, watch for balance transfer fees, which can tack on an additional 2 to 5 percent to the amount you owe.
Step 7: Set up an online bill pay system
The last step is to have a system in place to get all of the money you're saving and earning to your creditors as quickly as possible. It defeats the purpose of selling the DVD collection if you use the money to buy your family dinner from McDonald's.
You can find free online bill pay services at many banks and credit unions. Sign up, input payment information from all your creditors, and decide which bill to attack first. Then, every time you get some extra money in your account -- whether it's $10 from an eBay sale or $1,000 from an awesome yard sale -- send it straight to your creditor. As in, make the payment that day.
Don't let the money get cozy in your checking account. The longer it sits there, the more likely you are to use it for something else. When the money comes in, send it right out, and soon you'll enjoy the peace of mind and financial freedom that come with being debt-free.
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Washed down with water.
That saves lots-o-money quickly.
1) drop the smart phone and get a "dumb" one. Save about $50 per month. Get a low-priced tablet (e.g., Kindle Fire) or use your old iPhone as a wi-fi only device. Wi-fi is available everywhere; you really don't need to pay for cell-based data plans
2) call your car and home insurance company and tell them you want to go through all your coverage because you found another carrier that is cheaper. They'll probably help you "find" 10% off or more.
3) speaking of car insurance - An expensive policy from GEICO, Progressive, etc. is not needed. You can find one usually for less than $30/month from Insurance Panda (I pay $25!). If you spend too much on car insurance from one of those big companies, chances are you are simply funding their expensive TV ads with cute animals.
4) compare what your house is really worth to your assessment. Many assessments have never been properly adjusted down to reflect the market over the last 4 years. We cut our property taxes by about 20%.
5) re-fi your 30-year mortgage to a 15. The interest rate will drop by at least 50-75 bps, more depending on your current rate. The payment may go up slightly, but it is because you are paying off your loan faster. If it's possible, get the mortgage paid off before the kids go to college. At a minimum, have it paid off before you retire.
6) review your credit card bills for all the things you are paying $10-20 per month for that you no longer need. I bet everybody has at least a couple
7) drop all magazine (paper and on-line) subscriptions. Sorry WSJ, but that includes you too. If you look around, you can find comparable content for free.
8) review your investment portfolio for ways to replace higher fee mutual funds or ETFs with lower fee ones. S&P500 funds/ETFs shouldn't charge more than 0.10% in fees. Fees may be higher for specialty funds, but they are all coming down fast. If your company 401K uses high-fee funds, talk to the folks in charge. A difference of 25 bps in fees will mean a difference of about 5% in your portfolio value after 25 or 30 years.
9) and of course the most impactful -- never carry a balance on a credit card. If you can't resist, cut up the cards.
Happily I continued with their examples in my own life. Now I'm among the top 0.1% in national individual income yet my cell phone plan costs $6.50/mo. and my home phones (2 lines with multiple extensions) cost about the same. I never set foot in a new car showroom because I'm not a fool. I have a beautiful but not ostentatious home, a staff to take care of the things I just don't want to do myself, etc. I am able to give substantial amounts to charity and that is very rewarding. Anyone can do what my parents and I did. They just have to actually do it. No piece of junk that you buy in a store can possible equal the happiness of financial security.
Another worthless MSN article.
1 "ruthless" step.
PAY YOUR BILLS
This type of article is useless. Yes, living like a dead person will save money, but what is the point? How about suggesting you stop eating or stop heating your home. THAT would sure save a lot of dough! People need pointers that really work WHILE you live. It is like starving to lose weight - everyone knows that people are very unlikely to stick to such a diet and will go off on a binge that is self-defeating. Better to have a slow and steady lifestyle change.
just stop living.
Anyhow....look up Consumer Credit Counseling Services, (MMI)...don't be fooled by shady companies acting like consumer credit. There are a lot out there. CCCS will consolidate your credit card debt & you will pay ONE amount towards the balances per month. Instead of the 13 years that it would take me to pay off my debt...it took 5 years & I saved $60,000 in interest. Best move I ever made. I now have one credit card that I use & I requested a low credit limit on that. I pay it off each month if I use it. I mostly have it for emergencies.
Some people are not capable of doing steps 1,2, and 5. And they still blame George Bush for that too.
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