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Easy Steps to Manage your Debt

Debt can feel crushing and embarrassing, and it can instill feelings of panic and fear. However, you need not feel this way. Managing your debt does not have to be difficult, but it does require basic emotional assessment, behavior tracking and some good old-fashioned number crunching. By taking a few simple steps, getting your debt under control can be as easy as 1-2-3.

STEP 1 – Emotional Self-Assessment

First, take a deep breath and take stock of your situation, removing all feelings of judgment and shame — these feelings will hold you back. Ask yourself “how did I get into debt?” You may have experienced a serious medical problem, or you may have purchased more than you could afford. While you can’t change the events that got you into debt, you can change your approach as to how you manage debt going forward. Understand the problem and commit to solving it. Develop initiative and empower yourself to control the situation.

STEP 2 – Create a List and Budget: Include of all of your debts, interest rates, expenses and income sources

Loans, Credit Cards and Interest Rates

Do you have a college loan? How much do you still owe, and at what rate? Do you have several credit cards with high balances? List how much you owe on each one with a corresponding interest rate.

Yearly and Monthly Expenses Create a list of your yearly and monthly fixed expenses and due dates, such as rent/mortgage payments, car payment, car insurance, health insurance, basic food, cellphone, etc. Then make a list of variable expenses such as entertainment and travel. Track every single one of your expenses/charges for at least one month and include these in the list. Sometimes small charges are the cause of big problems. “A $3.95 daily specialty coffee during the workweek could cost nearly $28,000 over a 35-year career”, says financial planner Steve Orr.

Income Determine your yearly, monthly and weekly income. Does your income vary each month, or do you have a fixed scheduled income? Are you able to make extra income from other sources? If so, how often would this be possible?

Budget By collecting this information, you can construct your first budget. Seeing where your money goes can often lead to changes in spending behavior. Maybe you are spending too much on coffee each month; maybe you can get a cheaper cellphone plan. Tweaking expense levels, scheduling payments and minimums on time, or adding income can help you align your cash flow, pay bills on time, and eliminate fees and excessive interest payments.

Organize and Prioritize Your Debt List Once you have your preliminary budget set up, it is time to organize your list. Interest rates are now your focus. List your debts from highest interest rate (and corresponding amount owed) to lowest. Pay the debts with the highest interest rates first. Continue to make your monthly minimum payments on all cards to minimize extra fees and surcharges. By eliminating the highest interest rate debts, you will limit the amount of money you pay out over time.

Re-check Your Behaviors Remember the self-assessment in part 1 and the expense tracking in part 2? This is another place where both become important. Did you have a big medical expense, or do you have a spending problem? If you have a spending problem, once you pay off a credit card, cut it up and close the account. Pay off your other debts and use the lower interest credit cards to make charges. Don’t fall into the “charge it now, pay it later” debt trap. However, if you do not have a spending problem, you may want to keep the credit card open (as long as no annual fee is assessed to hold the card). Keeping a card open may benefit your credit report. While we aren’t going to chart all the credit scoring criteria here, the longer you hold a credit card account, the higher your score will be. Credit issuance and appropriate utilization will also increase your score. Needless to say, if you have a debt and spending problem, fix those first. Your credit score may help you in the future (if you want to buy a house or car), but if you hold too much debt, you will not be able to utilize your credit score to get a loan in the future anyway.

STEP 3: Make a Plan, Negotiate and Save

Make a Plan If you have completed step one and two, you are ready to put your plan into action. Assemble and chart your results. Place your expenses and due dates on a calendar. Put your debt payment dates on the calendar. You now know how and when everything will be paid. This should give you some piece of mind. Stick to the plan and watch your debt melt away. *Key note: If, after you complete your plan, you still do not have enough income to pay your minimum, seek expert credit counseling. Professional credit counselors can help you renegotiate your debts, consolidate debts, or help you seek bankruptcy protections.

Negotiate Your Rates If your payment plan is on track, continue to follow your repayment schedule. If you would like to save more money, contact your lenders and ask them to lower your interest rates. It is possible to negotiate lower rates and (sometimes) charge off old debts. You may be able to transfer balances to lower rate accounts (some credit cards offer a 0% interest rate for 12–15 months). Beware of balance transfer fees however.

Build Your Savings Do you have money left over after you have paid all your bills? You can now develop a savings cushion. Experts will tell you that you should have three to six months of cash on hand (minimum) to prepare for unforeseen circumstances such as losing a job or paying for a medical emergency. Negative events happen, and the last thing you want is to re-enter the debt pool because of it. You’ve worked hard to pay off your debts; with a savings cushion, you can enjoy being debt free.*

*This article provides broad and general guidelines and does not constitute professional financial advice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions.

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