The most recent numbers available (as of Oct. 2011) show that Americans’ total debt on revolving credit accounts (think: credit cards) topped $792 billion, according to the Federal Reserve. If you’re carrying even some credit card debt, you know that it’s much easier to create debt than it is to get rid of it.
Yet getting rid of debt – the unsecured kind that costs you a bundle in interest – is an essential step toward taking control of your finances. If you’re wondering how to pay off your debt, budgeting for it is essential.
Here are five steps that can help you get started:
Step 1 – Stop making new debt.
Overusing credit cards is a slippery slope. The more debt you create, the harder it becomes to pay for it. With cash tight, it’s tempting to keep using those credit cards for whatever you want or need. But in order to get out of debt, it’s essential to stop creating new debt. Use whatever trick works for you – cut up your credit cards, freeze them in a bowl of water, only use your debit card – to help you wean yourself away from overusing credit cards.
Step 2 – Decide what you’ll pay off first.
You have to start somewhere. Decide what you’ll pay off first. There are many schools of thought on how to pick which debt to pay down first. Some say you should first pay off high-interest debt since that costs you the most money. Others argue you should first work on the smallest debt so you’ll be able to pay it off quickly. Each approach has its benefits and pitfalls.
Step 3 – Get serious about budgeting.
Chances are, if you’ve been relying on credit to get by, you’ve had a hard time sticking to a budget. But if you’re planning how to pay off your debt, you’ll have to include budgeting in your plans. If you’ve never tried to live on a budget, it’s time to start. You can find plenty of online worksheets to help you get started creating a budget.
Step 4 – Again with the budgeting – we really mean it.
Once you’ve created a budget – or recreated that old one you’ve been ignoring – you’ll need to set aside money to start paying down your debt. Keep in mind that if you only pay the minimum balance on your credit cards you may never pay off the debt. Since you’ve already decided which debt to pay off first (see Step 2), crunch some numbers to determine how much extra you need to pay toward that debt each month to get rid of it quickly.
Step 5 – Do it.
It’s all well and good to say you’ve thought about how to pay off your debt, and to have a budget plan in place for achieving that goal. But you’ll need commitment and discipline to stick with it. Try setting up a recurring payment in the amount you’ve decided in on Step 4. Or give yourself some visual encouragement: every month when the statement arrives, post it on your refrigerator so that you can see that balance getting smaller as the months go by.