Getting out of debt once and for all

Are you struggling with credit card debt, student loans, medical bills or car loans? In the frugal living article for this week, we are talking about how to get out and stay out of debt. Read on for a step by step guide to tackle that debt once and for all!

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Budget Worksheet Photo

Are you struggling with credit card debt, student loans, medical bills or car loans?

Do you wonder if they will ever be paid in full?

If so, you are not alone.

Thankfully, there are steps that you can take starting right now that will get you closer to debt-free living every day. I am not going to tell you that it is easy to dig out of debt.

It isn’t.

If you are in debt, you will need to make some sacrifices to get out of that hole, but you will be so glad you did. The peace of mind that comes from living within your means is tremendous and well worth the effort.

Keep in mind that you do not have to stop enjoying your life to get out of debt. You just need to make some adjustments, some of which may be temporary, to get you to a more comfortable financial position.

Step 1: Determine Your Debt-to-Income Ratio

The debt-to-income ratio is an effective way to compare your debt burden to your total income. It is also one of the leading indicators of financial health used by lenders to determine creditworthiness. To calculate your debt-to-income ratio, add all your minimum monthly debt payments and divide the total by your net (after-tax) monthly income. The monthly minimum debt payments include mortgage, rent, credit card bills, car payments, student loans, child support payments and any other loans you may have. Do not include food, entertainment and utility bills when calculating your debt-to-income ratio.

Debt-to-Income Calculation:

Minimum Monthly Debt Payments divided by Net Monthly Income = Debt-to-Income Ratio

A debt-to-income ratio of .36 (36%) or less generally indicates stronger fiscal health. A ratio of over .36 is cause for concern and must be lowered through debt reduction. When your debt-to-income ratio is high, an unexpected debt, such as a medical bill or job loss, could mean financial disaster for your family.

Step 2: Complete the Debt Payment Worksheet
In order to track your debt and clearly see which balances need to be paid first, second, third, etc, you need to complete a debt payment worksheet. Gather your credit card bills and any other statements you have for other debt so know how much you are paying each month, what the interest rates are on the debt and the total balance for each debt. Fill out the form completely.
In order to determine the payoff dates for your debt, use the calculator.  You will need to enter the credit card balance, the interest rate and the payment amount per month. It’s a real eye opener to see how long it takes to pay off debt when you only pay the monthly minimum.
Step 3: Pay Them Off – One at a Time

Once you know how many debts you have and what the interest is on each debt, it’s time to start paying them off aggressively. There are different schools of thought on how to do this. Most finance people agree that paying the mortgage off last is a good idea since those rates are usually so much lower than credit card interest rates. But, when it comes to paying off credit cards and other debts, financial gurus differ in their recommended methods.

Most will tell you to start with the debt that has the highest interest rate and put everything you can toward paying it off as soon as possible. Once it’s paid off, put the amount you were paying on that debt and add it to the minimum you are paying on the debt with the next highest rate until that debt is gone. Then take the money that went to paying the first 2 debts and apply it to the next one and so on until all the debts are paid. When I was in debt, this is the method I used.

There is also a school of thought that encourages those in debt to pay off the debt with the smallest balance first so you can have that feeling of payoff success more quickly. This is purely a psychological response and is not based in actual numbers. If you pay off the debts with the highest interest rate first, you will pay less overall.

Step 4: Stay Motivated

Paying off debt does not happen overnight. Depending on your debt load, it can be a long process taking years. Celebrate every time you pay off a debt. Have a picnic in your favorite park, enjoy a treat from your favorite bakery or call your closest friend to share the exciting news. If it helps to see your progress as you pay off debt, post your Debt Payment Worksheet on the fridge or on the bathroom mirror – whatever works to keep you focused and motivated.

Additional tips to consider when paying off debt:

• DO NOT continue to incur more debt. Cut up your credit cards or freeze them in a block of ice and do whatever it takes to keep you from using them.

• Make sure you have an updated household budget in addition to your debt reduction plan. This will help you stay on track with all your household expenses.

• Build up an emergency fund of approx. $1000 so you don’t incur more debt when life happens (car breaks down, for example).

• Take a cold, hard look at how you are spending your hard-earned money. If you are struggling with debt, it is time to seriously reduce unnecessary expenses like restaurant meals, new clothes, expensive grocery items like premium cuts of steak, cable TV, smart phones and vacations until you make a huge dent in that debt. You don’t have to give up everything you enjoy, but you do need to make some significant changes. Switching out a cable bill of $80 per month for an $10 per month Netflix subscription saves you $70 per month.
• Sell items in your home that you no longer use and apply the money towards your debt. A great place to list these items is . Not only are you helping to get rid of your debt, you are also getting rid of clutter.

• Ask for help if you need it. You can contact your creditors, explain your situation and that you want to pay off all your debt in a timely manner. Ask for a lower interest rate and hopefully they will oblige.

• Call a non-profit credit-counseling agency that does not have a vested interest in making money off of your debt. A good resource to start with if you need credit counseling is the National Foundation for Credit Counseling (NFCC) at and toll free at 1-800-388-2227. The NFCC is a well-known non-profit agency that helps individuals with budgeting and debt reduction plans. Many of the services are free or cost only a minimal fee.
The key to getting debt-free is to start today. The steps you take now will help secure your future and give you a level of financial freedom you never thought was possible.

As I always say, it’s your money – spend it wisely!

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