My friends may make fun of me for being a frugal spender (which is really just my way of saying that I’m cheap), but they always wonder how I was able to control my debt. Because I get this question so often, I decided to put together a step-by-step guide to paying down your debt balances and increasing your savings in five steps.
1. Create an accurate picture of your spending patterns
For most consumers, this is the place to start. We often have an idea of how much money we’re spending on a daily basis, but the reality can be much different. All of those lattes with extra foam can add up, so for at least a week, carry around a small notepad (or create a list on your smart phone) so that you can write down every single thing that you purchase. Every. Single. Thing.
2. Make a list of everything that you owe
The other half of your financial picture is the collection of bills that you owe, which should include everything from student loans to your credit card balance. But don’t just list all of your debts; list the amount of interest that you are paying on each one. This is an important step because often times, you will want to start by eliminating the debt with the highest interest first.
3. Transfer your credit card balances to the card with the lowest rate
If you have multiple credit accounts, you should consider making a balance transfer so that you can eliminate the one with the highest interest. This can be a tricky move, however, because most credit cards offer a low interest rate to get you locked in and then raise it after a trial period. That said, the best credit cards often come from credit unions because they offer long-term interest rates, so it is worth a shot to apply for one if you’re eligible.
4. Negotiate your debt
Sometimes you can reduce your debt if you reach out to creditors to explain your situation. However, you should be keep in mind that while this will help you pay down your financial obligations sooner, you also run the risk of damaging your credit score. As a backup plan, look into getting a low-interest loan that you can use to pay off your debt.
5. Leave the credit cards at home
Now here comes the hard part; it’s time to leave your credit cards at home. Create a monthly budget for yourself, and then break that budget down into a weekly budget that you can then divide into a daily budget. This is amount of cash that you should carry in your wallet. This will ensure that you have just enough money for the essential expenses such as transportation. But don’t completely cut up your credit cards; the worst thing you can do for your credit score is close your credit card accounts because it affects your debt to credit ratio. Instead, just store them away to use only for emergencies.
Getting debt under control is really just a matter of simple math. You have to spend less than you earn. If you can wrap your mind around that principle — and then put it into practice — you’ll be on your way to a debt-free future.