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Sunday, January 5, 2014

Digging out of debt: 5 ways to get ahead

Pay off debt using debt management techniques
Debt management strategizes money use
By Ken Myers

Debt can be a stifling force for the average person. Student loans, mortgages and credit card balances combined with decreased wages have resulted in more people than ever facing a mountain of bills with increasing dread. Rather than ignoring the late notices and bills, you can face them head on with a commitment to reduce and ultimately eliminate debt using these five easy steps. 

Create an action plan

An action plan is the easiest way to guarantee success. Reducing debt and increasing financial solvency is no different. Before launching into an unsustainable or unmapped way to financial freedom, create a plan. A monthly budget is a great first step, but you also need to supplement it with a debt reduction calendar or a written proposal of how you want to tackle debt. Even a list of goals that cover the next five or 10 years can help keep you focused on the long and short term goals required for eliminating debt. Be comprehensive and complete by looking at the past year's expenses to ensure your goal is manageable. 

Cut back

For many, adding an additional job or income can be a struggle. Schedules in careers from hospitals to retail are sporadic and subject to change. This makes adding another income source impossible. Instead of making more money, many need to simply cut back on existing expenses.

Many of the services we use are unnecessary or overindulgent. For instance, cell phones can top up to $100 a month for a single person. Instead of paying these exorbitant fees, look into prepaid or flat rate services, such as Virgin Mobile's 
$35/month plan or Boost Mobile’s sliding payment plan. There are now dozens of options for low cost cell phone use. Cutting cable is another popular option now that Netflix and Hulu fill the gap for those wanting to keep up with current shows without paying a high monthly fee. Determine what expenses you can reduce or eliminate comfortably to create a "second" source of income in your budget. 

Snowball or avalanche?

There are two schools of thought when it comes to paying off debt. The snowball method starts by paying off the smallest balance first and gradually building up to the larger balances. Mathematically, this method results in paying more money towards interest, but the ability to pay off debts quickly provides instant gratification, improving the odds of continuing to pay down debt.

The avalanche method starts with the highest interest rate debt and works down. This method reduces the amount paid toward interest, but those with large amounts owed at high interest rates may get discouraged. While the avalanche makes the most financial sense, the psychological benefits of paying off debt may make the snowball method more desirable to debtors trying to dig their way out of the hole. 

Transfer high interest balances

According to America's Debt Help Organization, the average household carries approximately $15,000 in credit card debt from month to month. With the high interest rates of these cards, paying off this significant amount can result in thousands of additional dollars paid solely to interest. For those committed to paying off debt and maintaining a decent credit score, transferring high interest balances to a low interest card may be the best way to reduce interest payments.

A quick search for low to no interest card offers should yield the credit card companies that are offering these introductory interest rates. Be sure to read all the fine print, though. Many cards require a balance transfer fee that ranges from 3-8% of the total amount transferred, so be sure that what you save by transferring the balance is greater than just paying the current interest rate. If your credit score is low, call your current credit card companies to find out whether they will offer a low interest rate for transferred balances. 

Drain your savings

A savings account should be for emergencies, but many people in debt don't realize that credit card debt is an emergency. Even with a generous interest rate, there is no benefit to maintaining $5,000 in a 4% interest account while you accumulate 18% interest on a $5,000 debt. Whatever money you set aside for a rainy day needs to be put towards the debt. Rather than closing the paid off accounts, keep them open so you can put the balance on the account in case of an emergency. This will ultimately save the interest rates between the payoff and potential emergency.

A new year also means a new financial start. Getting debt under control is a goal anyone with a single monthly payment needs to be addressing. These five steps to digging out from under a mountain of debt can help anyone and everyone begin their trip to financial freedom.

About the author: Ken Myers is a father, husband, and entrepreneur. He has combined his passion for helping families find in-home care with his experience to build a business. Learn more about him by visiting @KenneyMyers on Twitter.

Image license: Alan Cleaver, Creative Commons