The get out of debt and into wealth plan
Today most people find themselves at the mercy of ever increasing debt and funds that simply will not stretch to cover their expenditures. Consumers today are looking for ways to get (and stay) out of debt yet studies show that most people feel hopeless about ever paying off their debt and improving their lifestyle. In addition all it takes to fall behind on credit card payments is one month of expenses that exceed your ability to pay. Yet there is hope and there are ways to get out of debt and into wealth. Here is what you need to know-
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- Prioritize your debt. The first step to take is to organize your bills so you can see exactly how much you owe and who your most important creditors are. Personal debt can be confusing enough without having to deal with paper overload. Unless you are absolutely sure about what you owe, it's easy to continue spending money.
- Make a solid plan for attacking your debt. Begin by listing everything you owe and the corresponding interest rates you are paying. What most people do is to pay the most important debt first. Then you can pay off the debt that carries the highest interest rate. What you are working to do is eliminate the debt with double-digit interest rates.
- Keep only one or two credit cards. It is important to remember that every time you use a credit card you are in effect borrowing money. The more cards you carry, the more confusion and paperwork you will have when it is time to pay your bills, particularly if you forget which credit card you used.
- Consider asking your credit card company to lower your interest rate, especially if you have a history of paying your bills on time. Just remember that it never hurts to ask.
- Make your payments promptly. It is important that you try paying off as much as you possibly can every month. Always pay more than the minimum amount you owe, even if it is only a small amount. When you pay a card off entirely, do not close the account (since this can hurt your credit score) but go ahead and have a little ceremony as you cut the card in half. The satisfaction of paying of debt is hard to beat.
- Cut out luxuries and extra items you know you can live without. When you are tempted to spend money on an item or service you want but may not need, remind yourself of all of your monthly obligations such as mortgage or rent, food, health care and transportation expenses, and the temptation should pass.
- If you own a home, look into a home equity loan or line of credit. It is important to understand that you cannot borrow your way out of debt, but using an asset like your home is essentially borrowing money from yourself. The best part of this is that the interest on a home equity loan or line of credit is generally deductible at income tax time, and you can benefit from the savings. Keep in mind though that you should only take out a home equity loan, however, if you are determined to remain. Many people cannot resist the temptation to run up new debt after you use a home equity loan to pay off the old balance. Since the equity in your home may represent your single largest asset, you might also want to consider refinancing your existing mortgage if the rates are favorable. Keep in mind that there are costs involved, but interest rates are at near-record lows and the overall savings may be worth it.
- Reinvest your savings. While there will be more money as you pay off your debt it does you little good if you simply spend that money with nothing to show for it. Set up guidelines that force you to invest your newly freed up money for retirement, investment income or something that will benefit you in the long run. Getting out of debt and using the money responsibility is what will lead you to getting into wealth.
