Paying Off Debt- Your Way to Financial Freedom

By: Gen Wright


Paying off debt is the first step towards getting rid of it and finding financial freedom at last. If you are buried in debt, you'll be glad to know that paying off debt involves three important but quite simple steps:

1. Stop adding to the problem by acquiring new debt.
2. Establish a reserve and emergency fund.
3. As you pay off each debt, use that money to pay down the next in line (debt payment snowball).

Here is more information on how to apply each step. Regardless of your situation, you can use these same techniques for paying off debt whether you have just a little or a lot of debt to pay off.

Stop Adding New Debt
This is such a simple step, but unfortunately many of us just overlook it, partly because we are unaware of how important it is, but partly because we are overwhelmed and just assume we will never get out of debt, so why even try? Take this first step today! Simply STOP using credit cards and loans for purchases-you are adding to your debt, and it will take longer to pay it all off. If you can't buy something with the money you have, don't charge it unless you simply have to do so.

Cut up credit cards, and don't use financing options or loans for things-save up money over a few months to make major purchases. Don't keep making excuses as to why you have to use a credit card for something, otherwise you will continue adding to your debt problem, and debt reduction begins by taking this first step and being disciplined enough to stick with it.

The truth is that why credit card companies and banks may want you to believe otherwise, you do NOT need credit cards.

Credit Card Myths

Credit card companies want you to fall for these myths:

Use Credit Cards as Safety Net
Credit Cards are Convenient
Credit Cards Provide Cash Back Bonuses and Other Perks

Myth - You need credit cards "just in case" as a safety net (actually, having some savings put aside is a much better idea). Using a credit card as a fallback plan should only occur if you have no other option, but you can make other options by starting to save some money and creating an emergency reserve.

Myth - You need credit cards because they are "more convenient" than cash, debit card, or checks. This is a myth-using your debit card is just as easy and keeps you accountable to what you are spending.

Myth - Cash-back "bonuses" make credit cards valuable. Actually, these never make it worth using a credit card-they don't remove the fact that you are paying interest over time. The interest the credit card company makes is always more than the "cash back" they give you. Give yourself the cash back by not using the credit card in the first place.

Instead of falling for all the false benefits that credit cards provide, instead begin focusing on the negatives: falling into debt and using credit cards can be a trap that is hard to get out of!

Establish a Savings Account as a Reserve

If you are really strapped with debt, you may not think you can save any money. Still, it is a good idea to try, even if the amount you set aside is small and you don't think it is worthwhile-it does add up. Over time, you will be really glad you saved something.

To start, try to save 5-10% of your income. If you can't do that, try putting aside $5, $10, or even just keep your spare change. Whatever you do, just get in the habit of saving whenever you can.

Having an emergency reserve fund can help you avoid using credit cards for those unexpected life expenses: appliance failure, car repair, medical bills, or job loss.

Make sure you do not allow yourself to spend this money for anything. That means you don't dip into the account to splurge and spend it on a luxury, dinner out, or fun item. You need to tell yourself, and believe it-that this is ONLY to be used as a savings account, and only used in case you absolutely need it.

Open a separate savings account for this, and if possible, don't make it easy to use this money by using a debit card. Or, open your savings account at another bank or credit union to keep it separated.

Pay Off Debts - One at a Time (Debt Snowball)

The third thing to do is to begin paying off debts, one at a time. Pay off as much as you can, and as soon as you pay off one credit card, attack the next one.

Pick a card to start with: typically it makes sense to pay off the one with the highest interest rate first, but if it makes you feel better to see some progress being made, then pick one with a low enough balance that it is achievable to pay it off fast. This will feel rewarding!

Here is the approach towards using a "debt snowball" to pay down debt:

1. Make a list of all debts and credit card balances.
2. Make a budget, subtract your savings and living expenses, then decide exactly how much you will pay towards debt each month.
3. Pick a credit card or loan to payoff first. Pay minimum payments on all other accounts, and use the rest of your budgeted amount to pay down that first debt.
4. Once you pay off the first debt (congratulations, didn't that feel good?), don't reduce your monthly payments-just apply that same money to pay off the next card in line.

This creates a snowball effect, where over time you have more and more money to pay down the next debt in line, so your debt reduction will speed up over time. Pretty soon, you will see the amazing results of paying off debt.

Paying Off Debts More Helpful Tips
Learn to be more frugal and find ways to cut back so you will have the money you need for savings and paying off debt. There is probably some way you can cut back enough to save 10% each month! Use coupons - you can even find and print them online, even if you don't subscribe to a local paper.

Get rid of some clutter and make some money at the same time. Consider having a yard sale or garage sale, or sell some of the stuff you don't need on eBay or craigslist. This can help you jump start a savings account with $50 or even several hundred dollars.

Paying off debt is achievable. You can do this! The important thing is to start today and stop making excuses.

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For more information on debt reduction, visit debt consolidation resource site

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