The key to getting out of debt and staying out of debt is to change your behavior. There are a lot of ways to help you consolidate your debt and improve your credit, but until you change your habits, it won’t stick. Before you seek out credit repair services, start by creating a budget and some tried and true practices that help you stick with it. There is no quick fix. Only time and effort will truly get you where you want to be: on the other side of debt.
Achieving Financial Security
Really staring your debt in the face is intimidating. It is much easier to push to the back of your mind, but it isn’t wise. Have the courage to face your debt today. Taking the steps to controlling your finances is not easy. No matter what the internet says, there is no fast and easy method. It takes time and dedication, but the relief you feel is beyond measure. Dave Ramsey is a trusted name in money management. Here is his baby step method, and how to tackle each step.
- Emergency Fund. The first step is to start a $1000 emergency fund. When you are struggling to pay the bills and keep the debt collectors off of your back, this seems impossible. It is necessary. You are playing with a fragile house of cards. One wrong move and it comes tumbling down. An emergency fund is your protection. If you have an unexpected plumbing problem or car repair, you need extra cash to handle it.
Accrue this money as fast as you can. This might mean selling some of your stuff on Craigslist. It might mean working a second job. Do whatever it takes to make some extra cash to squirrel away. Open a second checking account and deposit this money there. Do not touch it unless there is a legitimate emergency. Do not mix this emergency money with your regular account.
- Pay off everything but the house. Make a list of all of your debt except your house. List them in order based on how much you owe. The smallest balance is going to be your number one priority. Interest rates matter unless you are looking at two debts with similar payoffs. In this case, list the highest interest first. Don’t guess at the numbers. It is time to face the facts. This might be hard to see on paper, but it is time to take action.
Here, you will use the debt snowball effect. You will knock out your debts one by one starting with the smallest. Once you eliminate one debt, take that money and start putting it towards the next smallest debt. With this method, you start seeing results. As you work through your debts, the payments to each debt become higher and get paid off faster.
You will start by making minimum payments on all your debts. The smallest debt will get all of your focus. Throw more money at it than the rest. Any extra money you earn or acquire will go towards this debt until it is paid off. As you are able to pay off each debt, you will be motivated to stick with it and continue tackling each credit card and loan until they are all gone.
- Increase your emergency fund. It is easy to give up on your finances once you are out of debt. This could lead to taking up bad habits again. Once you make that last payment, it is time to build a real emergency fund. This includes three to six months of emergency savings. Calculate how much you need to live on for three to six months, and start saving. This will prepare you for whatever might come your way. Put it in a checking account, so you can pay for the emergency with ease.
- Start saving for retirement. Now that you are out of debt and are covered for three to six months in the case of an emergency, it is time to start saving for the future. Put 15-percent of your income in a retirement account. It doesn’t matter whether you choose a 401(K), Roth IRA or Traditional IRA. Find the plan that works best for you. If your company matches contributions or offers a retirement plan, put most of your retirement money towards matching your company’s contribution. Then, put the rest in a Roth IRA. There are many ways to invest in retirement that pay off big.
- Start saving for college and home. If you have kids, this is a good time to start putting money aside for their college. If you don’t have kids, start paying off your mortgage. You are one debt away from true financial freedom. Any extra money you can put towards your mortgage will save you big money in interest. Now that you don’t have other payments demanding your attention, consider refinancing to a 15-year fixed-rate mortgage. This will allow you to pay off your home faster.
Restoring Your Credit
Now that you are on the road to paying off all your debt and achieving financial security, you want to re-establish your credit. You have learned better spending habits. This is the time to start looking at legit credit repair companies. These resources can be used to help you manage your debt initially too. Just remember to stay focused on getting free of those payments once and for all. Once you have conquered your debt, it takes some work and time to recover your credit. Make sure to pay all your bills on time. Don’t use this debt-free opportunity to apply for more credit cards or other lines of credit. Applying for credit can hurt your score. Also, you just got out of debt. Resist jumping back in just because you are more financially secure. The tables can turn quickly.
Getting finances in order is no easy task. Stop trying to find that quick fix. It doesn’t exist. Develop a plan and stick to it. Using the snowball method to eliminate debt is a great way to stay motivated.