Debt Elimination Strategies

If you've taken on more debt than you can handle, don’t be discouraged. You’re not alone. Thousands of Americans are in the same boat, with many of them carrying huge debt loads. It doesn’t matter how much money you make. If you can’t live within your means, you become a slave to your creditors.

This article is by no means a comprehensive treatise on financial planning. Nonetheless, what follows are a few strategies to regain your financial freedom.

Ask Yourself Why?
Money is a powerful force that can destroy you if you let it. You must learn to master your money instead of letting it master you. If you don’t do this, you’ll never get out of debt. I’ll say it once more. If you do not learn to control your spending you’ll never get out of debt. Be brutally honest with yourself. Examine your internal reasons about why you are in debt. I’m not referring to financial blows beyond your control, but about the times when you let the power of money control you.

Here are some questions to consider: Do you buy stuff to mask your own insecurities? Are you using money as a drug to comfort yourself? Do you feel you have to compete financially with your friends, coworkers, neighbors, and family members? Are you trying to impress someone? Your parents? Who is telling you that you have to live high on the hog? What is it that compels you to buy that item right now? Why don’t you have enough self-control to buy later or never?

These are serious questions which must be answered before you attempt to control your money with any kind of budget or financial system. Otherwise, it’s like treating cancer with a Band-Aid. You might even consider psychological counseling for your money difficulties.

Assess the Damage
It is important you be fully aware of how much debt you are actually carrying no matter how painful it is. Take a sheet of paper, write down the amounts of all your debts, and total them. Keep this amount fixed in your mind. It has been said that pain and pleasure are powerful motivators. If the pain of carrying your debt is acute enough, you will take aggressive measures to change your behavior.

Attack Your Debt Right Now

Tear up your credit cards. Literally take a pair of scissors and cut them up. Call the credit card companies and tell them to close your accounts. You might keep one card with a low limit set by you, not the credit card company. Simply call the company and tell them to place a limit on your credit.
Pay off your highest interest rate card first, paying a little more than the minimum. This will shave months off your debt. With your other debts, continue paying just the minimum. After you finish paying off your highest interest rate card, move on to the 2nd highest interest rate card. Roll over the amount you paid each month from your first card to pay off this one. Don’t be tempted to use the money elsewhere! You must stay disciplined. You’ll pay off the second card even more quickly. Continue this strategy until all your debts are paid.
If you own your home, you might consider a debt consolidation loan. This kind of loan is a 2nd mortgage on your property which allows you to consolidate your debts into one payment. Some loan programs require no equity or appraisal. You can use this loan to consolidate credit card bills, car payments, or any other bills. Interest on this loan may be fully tax deductible depending upon your situation. Consult your tax advisor. As with any home loan, this is a lien on your property. If you sell your home, you must pay off both your 1st and 2nd mortgages. In addition, although you may be making lower monthly payments, you may be paying for a longer time period than if you paid off each individual debt.
How to Live Debt Free Forever
Now that you’ve reviewed some of the personal reasons you’ve found yourself in debt, and taken some drastic measures to attack your debt, it’s time to develop a plan to determine where all your money is going, and develop a healthy financial strategy. You must be able to account for every penny you spend each month. Wait! Don’t worry. You won’t have to cut your spending yet. Here’s a simple method to develop a plan which fits your comfort zone:

Step 1
Take a sheet of paper, and write "Master Budget" at the top. On one side, list all your relatively fixed expenses (mortgage/rent, telephone, electric, water, gas, car, credit card minimums, etc.)

Step 2

Now comes the tough part. You must estimate how much you spend on variable expenses like food, eating out, entertainment, stuff for the house, school, clothing, car repair, gasoline, etc. Here’s a great way to determine these expenses: Buy a small notebook. Write a different spending category on the top of each page. If you come across an item that doesn’t fit readily into any one category, make an executive decision and pick one. "From now on, magazine subscriptions go in the ‘Entertainment’ category." Carry this notebook with you wherever you go. Be very detailed on your categories. For example, one category might be "Eating Out." Under this heading, write down the date, description, and the dollar amount for each time you eat out.

ENTERTAINMENT

DATE
ITEM

AMOUNT

9/1/97
Gourmet Coffee
$2.00

9/1/97
McDonald's Lunch
$4.35

9/2/97
Donuts & Coffee
$3.00

9/4/97
Steakhouse Dinner
$35.87

This format allows you to see exactly where all your money is going. If you don’t know where your money is going, how can you expect to control it?

Step 3

Track all your expenditures for one month. At month’s end, total each category, and you’ll know exactly how much you spend on everything. You may be shocked to realize how much you spend on little things. For example, if you spend $2.00 per day on gourmet coffee, you spend $40 per month just on coffee. Why not buy a nice coffee maker, and make your own, or at least have coffee out only once or twice a week?

After you’ve totaled your categories, transfer them and their respective expense totals to your "Master Budget" sheet of paper.

Step 4

List your take-home income after taxes on your "Master Budget." You might want to develop two different budgets based on your two pay periods. Should you pay the phone bill on the 1st, or would it be better to pay it on the 15th? What I find is that one pay period usually has a tighter budget than the other because you have to pay the bigger bills like your mortgage, rent, car payments, etc.

Step 5

Now the challenge begins. Balance your income and expense categories, so you stay within your budget. Leave yourself a $100 cushion in your account. Take a long hard look at your variable expenses and see how you can reduce them. Let’s look at the category of "Entertainment." which may include dinners out, movies, movie rentals, plays, etc. Let’s say you’re currently spending $75 per weekend on eating out and entertainment. That’s $300 per month. Why not only spend $100 and take $200 to make a larger payment on one of your high-interest credit card bills?

You’ll have to play around with the amounts you set for your variable expenses categories. You don’t want to completely cut out your fun. Otherwise, you’ll give up on your budget completely. Cut back a fair amount, and see how it feels. Adjust as you go. Ask yourself questions like: Could we sell our home and buy or even rent a smaller place until we get back on our feet financially? Should we move to a different area where housing is less expensive? Do I really need to buy premium gas? Why not wait and rent a movie, instead of paying $10-$12 to go to the theater? Do I really need all those magazine subscriptions? Do I really need those movie channels? Could I live without cable TV? Do I really use my bottled water service? What are some cheaper alternatives? Do I really need a new dress, suit, purse, jewelry this month? How you answer these questions all depend on how quickly you want to get out of debt.

Step 6

By now, your Master Budget should list every category where you money goes. When you start living out your new budget on your the next pay period, take your notebook and write the individual amount you have allotted for each category at the top of its own page. Think of each category page as a mini-account log. Every dollar you spend must be categorized and deducted from its appropriate category account balance. Remember to carry your notebook with you everywhere. When you get to zero in one category, you can’t spend any more in that area! However, what you’ll find is that you have other categories that have money left over at the end of your budget period. You can roll these amounts over to categories you've zeroed out, or better yet, use those extra dollars to hammer away at your debt. Revisit your master budget and adjust it accordingly.

I hope these tips have encouraged you. Good luck on pursuing financial freedom!