Debt | A New Year’s Resolution that Matters (Video Below)
Debt Free – If you’re like the average American household, you probably have debt – maybe even a lot of it. And you’re probably wondering how you’ll ever pay it all off. If so, it may help to know that you’re hardly alone. Some people owe a lot of money. When you look back on what you have been able to accomplish in your life, chances are that it was all possible due to indebtedness. When it comes to reaching your financial goals, there’s real merit to writing everything down, from your total indebtedness to your budgeting plan to your spending patterns. Getting out of debt isn’t easy — but it is possible, even if you have no money, no assets (Protect both if you do), and no idea how to start.
Skip regret and become debt-free in the new year. It takes a little fortitude, but it’s as simple as 1-2-3.
Keeping New Year’s resolutions is often a challenge. Some of us joke ruefully about how quickly we’ll stop getting up for that 6 a.m. workout, or how soon we’ll ditch the patch in favor of a fresh pack of Marlboros (Neither of which should be a joke).
Of all resolutions, gaining financial ground is one of the most commonly broken, especially if the debt is nipping at your heels.
Make 2020 the year you keep that get-out-of-debt resolution. Following these three simple steps will get you out of debt and onto the solid financial footing.
1. List what you owe
Sit down and make a list of every outstanding balance, including:
- Student loans
- Credit card balances
- Auto loans
- Any other place you owe money
Also, list every balance and, if applicable, every interest rate.
2. Decide which debt to slay first — and focus on it
Some experts recommend going after the debt with the lowest balance first because it’s easiest to kill. The act of quickly paying off one entire balance can provide helpful motivation to pay off additional debts.
I’d aim for the indebtedness with the highest interest rate. “The Best Way to Kill Off Your Credit Card Debt” explains how the two approaches work, and why focusing on the debt with the highest interest rate is the most cost-effective approach.
In some cases, the circumstances of the indebtedness will determine which obligation you should tackle first. For instance, if you’ve borrowed against your retirement plan and feel your job is at risk, pay that debt down first. If you lose your job, you’ll have to repay the debt relatively quickly or risk having it termed a “withdrawal,” which comes with a big fat tax bill.
Once you have determined which debt to target first, do so with laser focus. After you’ve met your basic expenses for the month, make the minimum payments on other obligations and throw as much cash as possible at the targeted debt.
Not sure how to cut costs? Start by tracking them. A free service like You Need a Budget will tell you where your dollars are going. Such knowledge can be a real eye-opener.
3. ‘Snowball’ your remaining debts
Once you’ve paid off a debt, you can “snowball” it — that is, direct all the money you had been paying each month on that debt to the next obligation on your hit list. Again, make minimum payments on all the other debts while you focus on paying off that next debt quickly.
Don’t just kill your indebtedness though. Write their obituaries. Certified financial planner Kimberly Foss suggests posting reminders of paid-off debts where you’ll see them — such as the bathroom mirror or on the fridge.
Highlighting the zero balance with yellow or pink marker drives home the point: “I have paid down X dollars — look how much closer I am to my goal!”
“That gives you momentum,” says Foss, founder, and president of Empyrion Wealth Management in Roseville, California.
Foss also suggests that holders of rewards credit cards apply those reward points toward their balances, instead of trading them in for gift cards or airline tickets.
Keep your eyes on the prize
Momentum matters, but don’t be surprised if your anti-debt resolve wavers a little now and then.
Think about the last diet or exercise regimen you tried. At first, you felt confident, strong and happy to be taking charge of your health. After a while, though, you wanted to sleep in or to go out for burgers and fries.
That’s natural. It’s also fatal to any kind of progress. If you want this to be the year you take charge of your money, remember two things:
- You didn’t get into debt overnight.
- It takes time to whittle it down.
Try not to wallow in regret. Wishing you hadn’t spent all that money doesn’t do much good. Instead, focus on the progress you make. Snowball those debts. Write their obits. And stay away from the Marlboros. Read more…
The new year is the perfect time to start making solid financial solutions that can lead to lasting change in your life.
Assessing your finances can be overwhelming. If this list seems daunting to you or you want help creating a budget, credit counseling can help. If you want to reach your financial goals in 2020, why not start now? The new year isn’t only time when you can (or should) set fresh money goals, but this time of year is a prime opportunity to be intentional about your spending habits.