I talked about how I got into debt in my post, Crawling Out of Debt. In this article, I would like to share some tips that helped me get out of debt and grow my net worth from a negative number to a positive one.
1. When you want to spend money, figure out a way to earn some more. When you are in debt, you need to be careful you don’t spend more than you earn because doing that would only increase your debt instead of reduce it. It doesn’t matter how you do it, as long as your “goes ins” equal or exceed your “goes outs.”
If you want to buy a new camera, for example, try to sell some things you don’t need that are laying around your house. Or perhaps you can buy something cheap at a garage sale and sell it for a profit on eBay. If you make an effort to do this whenever you want to buy a new “toy”, it will make it easier for you to afford whatever it is you want to buy. And, more importantly, it will help prevent you from growing your debt even more when you are really trying to get out of debt. Whatever you earn will help pay for whatever you want to buy.
2. Make credit card payments each month. Even if you just pay the minimum, you have to make monthly payments on time. It will affect your credit score for the rest of your life. When you got that credit card, and every time you made a purchase, you signed an agreement saying you would pay your credit card company per your cardholder agreement. Now that you are in debt, don’t forget how you got there. Make regular payments to your credit card company.
3. Take advantage of 0% balance transfer opportunities. Just because you are up to your ears in credit card debt does not mean you have to take a beating with high interest rates. If you are making a reasonable effort to pay off your bills, i.e. you are making monthly credit card payments, the odds are you either have received or are qualified for a 0% interest balance transfer credit card offer. If you make the same payment each month to a card with 0% interest, you’ll pay off much more of the principal. Every cent you don’t have to pay in interest to your credit card company is money you can use to help pay off your credit card debts.
4. Once you pay off a credit card, beware of high credit limits. Do you really need a $25,000 line of credit? If you don’t, call and ask to have it reduced. They don’t get those kinds of requests very often, but trust me - the bank won’t mind. And it will be harder to spend as much money if you don’t have that kind of credit line with the bank. It will also keep your debt from spiraling out of control.
5. Keep track of your spending. Where is all of your money going? How much of it are you throwing away when you could be using it to reduce your credit card debt? Use Microsoft Money or Quicken. Download your bank statements and enter them into the software. Try to do it once a week or so that way the transactions are fresh in your mind. Try to break it down and figure out where every penny goes. I can’t say this enough - every penny you waste is money you could be using to pay off your debt. Knowledge is power, and when you are trying to reduce your debt this type of diligence can make a massive difference.
6. Get the best rate for your money - by paying off your debt instead of saving money at a low interest rate. I can’t tell you how many times I have seen people call into Suze Orman’s show and tell them they were saving money at 2% interest while they had thousands in credit card debt and were paying 18% interest on that. Every time, Suze yelled at them because they were being foolish about what they were doing with their money. People that have thousands in credit card debt yet put money into a savings account earning a low rate are losing money every day because they could be earning 18% interest on their money by paying off their debts and NOT having to pay it any longer. I am not saying you should not be saving money, but what I am saying is that you need to be realistic when you look at the amount and interest rate of your credit card debt when compared to the interest rate you are earning from a savings account. The odds are that you will be better off using some of that extra cash to pay off your debt.
7. Save cash for the holidays so you avoid adding to your debts. A lot of people spend the whole year trying to reduce their debts but then find themselves with thousands of dollars of new credit card debt after the holiday season. Don’t let that be you - plan ahead for the holidays so you can avoid holiday debt. My wife got me into the habit of contributing a small amount each week ($25-$35, for instance) into a “Christmas Club” account. We do this through ING Direct and have the money deducted from our checking account every week. The money we deposit goes into a separate account, growing and collecting interest all year. By the time holiday season rolls around, we have plenty of money for Christmas and don’t have to worry about holiday-related credit card debt. This also works great for vacations– we do the same thing, but call it our “Vacation Club” account.
8. Put your cash into envelopes so you are not tempted to spend beyond your means. A great way to budget is to take out the cash you need for things– gas, food, bills, etc., and put the money, in cash, into a few envelopes. Want to buy a pair of shoes? The money will have to come from somewhere. So you either eat less food, use less gas, etc. You get the idea. This forces financial discipline. It works!
9. Avoid “get rich quick” schemes. Lots of people fall into these traps. But few people actually get rich from them. You probably didn’t get into credit card debt overnight; don’t expect you can get out of it quickly either. The key to getting out of debt is to become more disciplined about your money and put as much effort as you can toward paying off your credit cards.
10. Try to cut out every day expenses. Do you really need to buy the newspaper every day when you can read it online? Do you need to buy magazines from a news stand when you can save a bundle by subscribing or just borrowing them from the library? Do you need to spend $10 on lunch each day when you can buy frozen meals for $3 or less, or make your own sandwiches for under $1? It adds up quickly, and it all adds up to money you can use to pay off your credit card debt. Don’t throw away this cash on things you can go without, cut every corner so you get out of debt as quickly as you can.
11. Save your pre-tax income. If your company offers a 401k, take advantage of it. Over the past few years, I was able to save a very painless $250 per month of pre-tax income. I didn’t notice it at all, and had I not saved it pre-tax I would have paid more than $80 of it in taxes anyway. But now, after a few years of painless saving, that account has ballooned to over $15,000. Even if you don’t directly use this money to get out of debt, you will only miss two thirds of whatever you save because you would have paid the other third of it in taxes to the government anyway. So take advantage of this opportunity to grow your net worth by saving your pre-tax income.
