If you find yourself in debt, it is important to make a plan to get out of it before it gets larger. With interest charges and finance charges, your debt can grow out of control quite quickly. Some people think they are doing alright if they are able to make the minimum payments due on their accounts. By paying the minimum payments, you are only paying the amount of interest charges and maybe a little towards the principal amount. By doing this you are not paying much towards the principal and it will take many years to pay off the balance, even if you don’t charge any more to it.
One of the most important steps is to make a monthly budget so you know how much money you have coming in and what expenses need to be paid. It is important to consider wants and needs to see which expenses can be cut down on or cut out completely at least until your debt is paid off. It may mean some sacrifices, but in the long run it will be worth getting out of debt. The more money you end up paying in interest or finance charges means less money that you can save for your future or other purchases you want to make.
It is also important to understand what you are spending your money on and what spending can be cut out. It doesn’t do much good to pay off your debt if you will end up in debt again within a short amount of time. You need to learn how to live within or below your means.
There are two main suggested ways to paying off debt. One is to make a list of all of your debts from the largest amount to the smallest. Each month you pay the minimum amount due and apply any extra money you can afford to the smallest debt. Once you get the smallest debt paid off, apply that amount to the next smallest amount. Continue up your list until you are debt free. Dave Ramsey calls this the Snowball effect because by paying off each debt you pick up momentum like adding snow to build a snow ball.
Another option is to make a list of your debts with the debt with the highest interest rate and down to the lowest interest rate. The thinking behind this concept is that you will save money by paying off the debt with the highest interest rate first and then work your way down the list.
Either plan will work, it just depends on which works for you. Once you get your debt paid off, you can start putting the extra money you have into savings.
Paying off your debt may seem impossible, but with some planning, it can be done and you can be debt free.